Snapshot Notes - May 28, 2008


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WEDNESDAY, MAY 28, 2008

Technical Trading is Hard to Extrapolate

05/28/08 3:50 PM EST

As of:

SPX 1386

HELP ARCHIVE

Many traders' eyes have been glued to the financials today, specifically the banking sector and the BKX Banking Index in particular. That index has been flirting with multi-year lows, and is threatening to close at its lowest level since 2003.

If the banks can't hold support, then it's hard to imagine the broader market will either. A couple of weeks ago, we went over a small study that looked at what's happened to the broader market when it holds up despite a weak banking sector, and it was consistently negative (it proved to be this time around, as well). Lots of folks are watching the 75 area on that index.

It was a lackluster trading day today, without much direction. It seemed like a very "technical" day, with short-term traders driving the activity based on common patterns (an inverse head-and-shoulders on an intraday time frame) and widely-watched levels (such as pivot points). That's fairly common on non-directional days.

In the process, the indices have carved out an interesting pattern. I checked for any time the S&P 500 tracking fund (SPY) gapped down at least 0.25% and never traded in positive territory, closing at a one-month low (like it did on Friday), then enjoyed two consecutive up days - with neither one closing the gap from a few days ago.

SPY completed this pattern only three times in its history, but each time it led to short-term gains, with the fund up at least 1% over the next three sessions (4/15/97, 1/13/98 and 12/31/02). Because some quote vendors use a 4:00pm cutoff for SPY and others use 4:15pm, you may have different results.

It's hard to read anything into just three instances, so I tested it against the sector ETFs I follow, and it also resulted in positive short-term returns about 75% of the time across most of them. The only exceptions were USO (oil) and XLY (consumer discretionary).

That isn't a big enough edge to get me excited on the long side, especially given the ho-hum readings from our intraday indicators and overall context as we went over this morning. Perhaps with a dash of positive seasonality coming up, buyers can continue to push us up here, but I'm not all that enthused about chasing it.

Given our current environment, I'm more interested in finding a good place to bet against a rally, and that should come if we do get a push higher in the coming days that takes the S&P 500 towards 1400 - 1420. The S&P and DJIA are the most broken among the major indices, and I prefer to concentrate any shorts there. For the moment, though, I'm not finding much that's setting up a solid edge, and am out of trading positions because of it.

Have a good evening and we'll see you tomorrow!

Banks Continue to Slide

05/28/08 10:30 AM EST

As of:

SPX 1386

HELP ARCHIVE

Good Wednesday morning...We begin the day with a mixed performance in the major indices, as they have all come back in off of a modest gap up opening. The broader sectors are also somewhat mixed, with the largest standout being the Banks. The BKX Banking Index is currently trading under the 75 level that marked the closing lows this spring, and a continued violation of that area is probably going to scare quite a few folks (for good reason).

Heading into mid-week last week, we went over a few encouraging signs of a short-term oversold market, at least on the technology-led Nasdaq 100 (NDX). When we've become that stretched in the past, that index has had a consistent habit of snapping back over the next several sessions.

It got a bit hairy to end last week, but the NDX managed to hold tough while the other major indices were breaking down. And yesterday's rally was led by the NDX, which is often the kind of bounce we see in a relative strength leader. But that bounce took the NDX right to the 2000 area that some technicians are going to point to as the possible right shoulder of a head-and-shoulders pattern that could be an ominous omen if the index breaks below Friday's low of 1950is. A break of that level would give a downside projection to about 1850, which coincidentally enough contains a cluster of other support as well. If the NDX drops below 1950 anytime soon, 1850 would be my general target.

But I'm getting way ahead of myself. For the here-and-now, I mentioned yesterday that the few short-term positives that popped up last week had mostly already been alleviated, with seasonality being one of the only exceptions. There is a pretty consistent bullish tint to equities at the end of May through the first few days of June, so that's still something to consider.

Other than that, our most sensitive indicators are no longer oversold, and a few squirted into overbought by yesterday afternoon. I've backed off the modest long positions I took last week, since as I noted yesterday we're facing a market that as far as I'm concerned is still within the throes of a bear market, the panic studies we went over in March have mostly played out, we saw multiple signs of too much optimism coming into last week, and then last week stocks (in general) weren't able to bounce from oversold conditions or technical support levels. That means I'll be looking harder for the next shorting opportunity rather than pushing on long positions, particularly in the "broken" indices like the S&P 500 and DJIA.

All the best,

Jason Goepfert

President and CEO

Sundial Capital Research, Inc.

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