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Time to Turn the Calendar and Look at the Charts
As we enter the homestretch of 2010 we find markets are negligibly higher. If you thought there was a smoothness to this point you would be highly mistaken – but of course volatile swings can be profitable for option trading. Double dip, euro crisis, QE2 and flash crash. All these and other terms caused some very nervous reactions so far this year, and I’m sure we’ll be hearing more about these into the future, but for now we focus on the chart action. As you look at the chart below, tell me what the market has done wrong? I can’t see it, either. Reading the chart: buy signal in place, market is overbought (and could stay that way), price at resistance. The start of September started the ‘risk on’ trade and 9% later the SPX is right up against the upper end of its zone. October-January starts a very strong seasonal trend for markets that may push it to the April highs. I don’t think it’ll be a straight shot of course, with the election on the horizon and tax policy still unsettled.
Changing History – The Hindenberg Didn’t Crash
That wasn’t so bad, was it? The ‘evil’ Hindenberg signal is over. Sure it was confirmed three times in August after it was first noticed. Yet, what happened? We dipped some, to the 1040 level on the SPX (see chart) yet roared higher. The ‘rule of thumb’ for the Hindenberg Omen was a drop of 5-7% over a 45-day period. After dipping that amount the market staged a huge rally and was actually up around 4%. It was said ALL market crashes were preceded by a Hindenberg signal. Did that happen, or will it happen? Can’t answer the latter but certainly the former was false. This signal combined with a death cross in early July was the seal the fate for this market…down into the abyss and never to return. Oh, my…did that happen? Of course not, the notion of market destruction was clearly wrong. Ye’ of little faith in the Fed! We’re about to embark on another signal, which many may look at bullishly – the golden cross, the 50 MA will cross OVER the 200 MA on/about October 12. Perhaps some fuel to throw onto the fire or maybe a chance to lighten up, too.
SPX Daily Chart
Ohhhh, I love Earnings Season!
Second week
of October is a big one for the markets – earnings season begins. While markets in August were probably discounting a double dip recession, that is most likely off the table. ‘Risk on’ trades are back in vogue, gold is at new highs, silver is climbing and oil is in demand. The commodity trade is one that I look to for ‘safety’ in conjunction with a weaker dollar. Financials have been laggards over the past six weeks or so; perhaps earnings in this group are not as solid. Certain tech names have risen sharply (NFLX, AAPL, CRM, PCLN) as valuations finally discount a growth scenario. We have played earnings to a great tune in years past and this will be no different. Volatility is low as fear subsides, only if we hear/see some difficulties from the leaders would we be worried. Over the next several weeks we’ll be looking at some potential earnings plays that may help us gain some ground as the focus shifts toward 2011 options trading.
Bob Lang
Portfolio Manager, Grandslam
BigTrends.com
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