Advice Written: 3rd January 2008 MDSnews Investment Advisory
Context: Long-term Investing
Terminology: Communicating to experienced investors, familiar with indicators and signals mentioned
With options expiration out of the way a red flag for equity market participants signaled last week, this is very concerning for the bulls . Price has started to act weak relative to long term breadth. In the chart (not shown), breadth moved up and formed a higher high however price formed a lower high.
We haven’t seen this type of signal for almost a decade. It will be interesting to see if the market stays around these levels for the next two weeks while the institutions bullish option plays expire. Then it would suggest the possibility of lower prices on the weekly time frame.
Only two weeks ago, there were many events suggesting higher prices were ahead. The Russell 2000, the weakest of all indices had stabilised and formed a potent double bottom on the daily time frame. The weekly candle was a bullish range expansion, the largest bullish range expansion since the August low.
The transports looked to be stabilising, long-term interest rates had started to turn up, increasing net interest margin relative to short term rates. The institutions had a bullish bias via their option positioning, retail market participants were bearish so on and so forth.
Then last week an event that occurs before a market crash or significant market correction signaled. The market became long-term over bought and prices had not moved up in alignment. Typically this means the large caps are being liquidated as a priority.
Sometimes your market analysis has to “turn on a dime” so to speak, and be immediately updated to take into account new economic data and signals as they present themselves.
The systemic risk indicators I monitor have triggered!
There is now the potential for a fast move to the downside, the double bottom in the Russell 2000 has failed, the 1000 point November/December Santa Claus rally has been negated.
The institutions are caught long and will have to sell. The retail participants are selling and their selling is in alignment with the institutions. When there are no buyers present, both parties will jump over each other to exit positions.
This event is setting investors up for a fantastic opportunity to the downside (investor talk for market crash)!
Reproduced with permission