"When misguided public opinion honors what is despicable and despises what is honorable, punishes virtue and rewards vice, encourages what is harmful and discourages what is useful, applauds falsehood and smothers truth under indifference or insult, a nation turns its back on progress and can be restored only by the terrible lessons of catastrophe." … Frederic Bastiat

Evil talks about tolerance only when it’s weak. When it gains the upper hand, its vanity always requires the destruction of the good and the innocent, because the example of good and innocent lives is an ongoing witness against it. So it always has been. So it always will be. And America has no special immunity to becoming an enemy of its own founding beliefs about human freedom, human dignity, the limited power of the state, and the sovereignty of God. – Archbishop Chaput


Wednesday, May 9, 2012

HUI holds Critical Support - Upside Reversal

In yesterday's post I mentioned that if the HUI was going to bottom, it was going to do so right now and right then. See the link here...


If not, it was going to drop down towards the 340 region on a final washout.

In today's session, apparently the buyers showed up in a very large way at this key techical level. The index put in what is called in technical analysis terms, an outside day bullish reversal. This basically occurs AFTER A MARKET HAS BEEN IN A SUSTAINED DOWNTREND, goes on to make a new low for the move (which the HUI did today sincking all the way to 392), then reverses higher taking out the previous day's high.

Note the chart pattern.

What we need to see however to CONFIRM a bottom, is for additional upside followthrough to occur that takes the index AT LEAST through the blue line noted on the chart just above the 420 level.  I will feel much more confident however about the sector in general if it can CLOSE A WEEK ABOVE THE 440 LEVEL particularly if it can clear the initial Fibonacci retracement level near 434.

This reversal pattern used to be very reliable in the past but with the advent of the hedge fund algorithms and their inept, clumsy and downright incompetent trading patterns, rushing ALL IN or ALL OUT on any given day, I have seen too many of these patterns turn out to be one day fake outs. This is why I tend to be a bit more conservative or cautious and prefer to see some additional signs of solid buying before getting too optimistic. All too often we see sellers come right back in and use the rally to unload on the new longs that have just come back into the market after patiently waiting for an entry point only to get slapped in the face.

If the bottom is for real, it will manifest itself shortly. Let's see what we get the next couple of days.

One thing is certain at least for today - the shares were just too cheap for some to pass up. It also looks like there was some profit taking in those hedge fund ratio spread trades today.

What's with 1350 on the S&P 500

Note that for Friday of last week, Monday of this week and Tuesday, the S&P has crashed through the 1350 level only to keep rebounding back up through this level. I have watched it trade throughout the entire session and have noticed that it keeps getting sizeable bids coming in to take it back up but once that buying dissipates, the sellers come back in and use the rally to pound it lower. Then back up it goes. It appears that someone of large size is attempting to defend this level.

I remember writing back in February how stubborn this level was on the way UP and how it could not seem to clear it on a strong closing basis. Once it pushed through it of course triggered a large amount of short covering and went on to make new yearly highs.

What has transpired since then is that sovereign debt woes out of Europe, combined with deteriorating economic data out of the US and some slowing in growth out of China, has traders moving away from the so-called "Growth Assets" or Risk trades and into the Dollar and US Treasuries.

That flight of money out of equities has taken the S&P back down to 1350, which is now serving as a support level on the technical price chart. This level also happens to closely correspond with the 100 day moving average, which is still rising, unlike the 50 day which has now decidedly turned down. It also is quite close to the solid red horizontal support line noted.

My own opinion, and I cannot prove this, is that the ESF is in the market attempting to prevent this swoon in the market from becoming something more sinister. There looks to be some light support below this level near 1330 which if that gives way, should see the index drop below 1300 and down towards 1285 or so. Chartists will therefore see this 1350 level as quite a key to where things are going next.

If it goes, fasten your seat belts. Then again, it might be just the thing to send the Doves at the Fed scurrying to the microphones with hints of more QE, sooner rather than later.