Not A Whole Lot Of Panic

Not A Whole Lot Of Panic

By normxxx | 4 January 2008

We had a decent long setup coming into the year, but it has failed and I managed to come out just about about flat. (I mentioned that I ended the year with a slight positive bias, but my shorts have done better than my longs did badly, so I 'lucked out'.) Not the best way to start the year, and I've backed off trying to buy into these oversold conditions as the technical picture in the S&P has deteriorated further.

There are plenty of examples to point to that show a severely oversold condition, at least in the very short-term. Volume on the NYSE is running 12-to-1 on the downside, the Arms Index is well over 3.0, and several of the broader sectors are showing price declines greater than 3% on the day. All of the above have typically led to short-term rebounds over the past decade, with a success rate between 70%— 85%.

I'm not banking on that tendency to repeat itself, at least not yet. I'm not a fan of trying to buy into a market that has had so little ability to rally from recent oversold conditions, with seasonality that is now turning a bit negative if anything, and lukewarm sentiment on an intermediate-term basis. But Monday will tell; Wall Street comes back to work from their Holidays in the Hamptons. If this does not signify anything other than "nerves," expect at least a 200 point bounce on Monday.

For those trading pure price, there could be an argument that the S&P may find support around 1400 - 1410 based on the long-term uptrend line from 2003 and the closing lows from August and November, but I don't trade purely off price levels.

I imagine we're going to start hearing rumors of an emergency Fed rate cut, but unless it actually happens I would stay away from trying to trade any rally based off such a rumor. About the only thing that would interest me from the long side at this point— and it would probably only happen on Monday— is a complete washout with new lows that expand to over 800 (they're currently sitting at about 500 on the NYSE) and huge volume. Given the mixed longer-term sentiment readings, I'm not interested in buying big price declines that don't generate panic-level readings.

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Normxxx    
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