short term bounce - how we caught it absolutely spot on

First off, we need to boast a bit( ;-)). We made nice money the previous week and caught the jump out of the window on monday-wednesday and the escalator up on thursday. Friday, we sat back and enjoyed a good week. We are actually pinching ourselves that we were so dead on.
As for our trades, we used sds, SSRI, GG, (L) and short DTO, MS as our trades. Our course, we bought and sold some UNG to reduce our cost basis (though we are still in the red on that ;-().

Anyways, more important stuff, our charts which helped us catch the action and our reasons for doing it. The chart we used is of the SPY above. We had called for the bounce from july 15 to not go all the way to the 200d/upper trendline because there was this staircase like trendline, which every tom/dick/harry was watching. When such artifacts emerge, you betcha the market would love to destroy it. That is exactly what happened. We hit the bottom of the channel and bounced. We did not expect the violence of the bounce ofcourse and this explains why we sat out on friday. Since after thursday's huge rally, we closed our longs and only had a few shorts on.

About what's next - Everyone will be watching the green line which is the first descending trendline resistance. As of now, we are betting that we are going to break that line to the upside. Our reasons are below:-

1) That line coincides with 20d, 50d and a bevy of resistance lines, we are going to pierce it
2) The momentum indicators are showing a bullish divergence from an oversold condition, as they should given the viciousness of the bounce.
3) More importantly, longer term this market is going down. There are no two ways about it. This is not the bottom in our opinion. So, if our experience with reading charts suggests anything, we expect to see a period of long sustained decline in the indices, not a sudden -800 pt decline. This decline will be much larger and will take the dow possibly into the 9000 and beyond area. Now the reason, why the green line has to be broken is because the line is too steep. For such a sustained move to occur, the ideal pace would be the blue line on top. Wicked, huh?
4) There are of course, psychological indicators, e.g. news on TV etc, Markets don't crash after the front page shows a lady clutching her head in agony.

What next?- We expect the market to hit the 200d in this iteration and even pierce and stay above it for a little while. We absolutely need to pierce it, to get people to change their bearish stance. It is essential for the next leg down.

How long till we hit it? - Our guess, is about 3-4 weeks, until the stochs becomes overbought. The 3-day RSI is overbought. We are also guessing, this up move is going to be choppy and grinding like a staircase, not the elevator rides of the last week. Since, this is going to be choppy it will be time consuming. It will be choppy, suggesting we are running in the direction opposite to the major trend. E.g. look at the down trends from oct, 07 to jan 08 and other downtrends. They have been swift, the uptrends have trended to grind their way upwards, suggesting further downside. We are expecting similar grinding action in the coming weeks.

If it not choppy, we will have to redraw our charts and look at them in a different light, possibly a bullish light.

Short term bounce

No much time to post. But we had an amazing day of trading today. Our entire pf is up 6% due to our exposure to GG(L), SSRI(L), UNG(L), dollar (short) and short Insurers. Ofcourse, we booked profits in a big way and we took off most of these trades at the end of the day.

We think a short term bottom (3-4) days is on the horizon somewhere. How far do we think the SPX can go to, our first target is 1190 and then the max. target is 1230. We doubt it will get there, but if it gets there, we are loading up on shorts. Our target on SPX is around 1070. We are not overtly short the market or overtly long gold and PMs now, since we are also in shock and awe.

The Dollar

The dollar is a very key reading to understanding the market action. Above is what the dollar has done in the last month. It has had a 10% rally in the last month. For a currency this is truly garguantan, especially when the reason the dollar is rallying is not due to inherent strength but the weakness of other currencies. While we believe in the intermediate term (3-6) months, the dollar will continue to rally upto 80 or so, at this point in time, it look overextended. Points in favor of dollar bears,

1. The dollar is on a long term resistance trendline (not shown here), which is around 78 on this charts.
2. The recent consolidation in the dollar after this huge move is unhealthy. It has been consolidating sideways to upwards.
3. Bearish divergences on the all the momentum indicators.

Q. Would I short the dollar here and any targets?
We would wait for the stochastics to break below 80. Once that happens, we expect the next stop to be around 75 on the $USD.

Well, dollar weakening would spark a bounce in the commodities. Our guess is oil will see 130-135$ or so, before the dollar starts to regain momentum. We believe silver will atleast fill the gap upto 14$ and gold will rise to atleast 850$.

As for the markets - some of the correlation of markets and oil has started to unravel recently. We still slightly favor the upside for stocks, until the trend is broken. But airlines for sure will get clobbered should oil rise.

A Triangle appears

The Dow and SPY have frustrated the bulls and the bears alike in the past few weeks. Well, the charts show exactly that. We have been bouncing around in a triangle in the SPY, DOW and even in the transports. Triangles are explosive creatures, akin to keeping a spring coiled up within a box. Whichever edge rips, there is bound to be explosive action in that direction. We are slightly bullish still, we believe this market could rip higher next week. We believe the first target on the SPX could be around 1310-1320 or so.
On possible plays, look at XLV (the biotech sector - thanks to hil_feld for pointing us there). The sector has indeed been among the best performing since July 15th. It seems all the hot money is going into biotech. XLV looks to be consolidating nicely on the 200d. It just looks ripe to make another move.

Indices

Above are the charts of the NASDAQ, SPY and TRAN. We got the call for a rally in commodities and the downtrend in the market in the beginning of last week, followed by the nice bounce on friday almost perfectly. Where this bounce has brought is that, we are now sticking our heads up against against the same line which was providing support (for the past few weeks) SPY. Now it has turned resistance.

The charts are not suggesting one way or another to us here, decisively. We are slightly favoring the bulls with odds of 60-40. Our thinking is this, the NASDAQ is butting against the 200d. As seen from the chart in the past, the NASDAQ has always managed to penetrate the 200d, before turning back down. We believe NASDAQ could see the 2450 level. The TRAN has some more space to travel upwards. The first area of resistance is around 5150. Why we are unsure of the overall picture given we have upside wiggle room in these indices, is because the SPY seems to be missing this upside space. The SPY is against lots of resistances and it is entirely reasonable to assume we sell off hard after touching the ascending trendline. But somehow that trendline in our view, is kind of "artificial" or "too visible". It has had too many hits now that it has become so obvious. Previously, we called for that trendline to be broken on the downside, since it was too obvious. We figure, what the heck, why can't it be broken on the upside then? Bottomline, slightly bullish, but we will not prefer to play unless we have confirmation that the trendline is broken. If it does break, we could see 1320 on the SPX.

Next few days

The past few days' action has left many perplexed - as hil_feld rightly commented on one of the posts on this blog. The basis for the movement today was actually bullish in the face of oil going up and Freddie and Fannie getting spanked.

Naturally the question is where does the market head from here? We look at two charts the transports and SPY for an answer
First, the transports has a possible (perhaps sloppy) Head n shoulders. However, the right shoulder looks weak. It needs some more filling. Accordingly, we are expecting at least a rally on the transports to 5150 level - a possible upside of about 4-5%.
Another piece of evidence is more of a contrarian pyschological one. Almost every tom, dick and harry has been watching the ascending line on the SPX and the DOW. Once, it broke, there has been a sea shift into bearish mode. Somehow, we believe there will be another push upside, just because the market has its own mind. Our first target on the SPY is around 130.4.
Finally, the intra day volume in the past three days, is actually showing bullish divergences - low downside volumes and higher upside volume today.

Our vehicle to play this upmove, would be the QLD, since it is now resting on support. Furthermore, the AAPL chart looks prime for another blast upwards.

Where is the money going?

Money has rushed out of commodities in the last month and undoubtedly stocks have rallied. But somehow, the action is not commensurate with the bashing of commodities. We believe this is going into the dollar and the bond market. The bond chart shown above has raced, unlike the stocks which have drifted upwards. However, the chart is unsustainable and is at key resistance levels. The bearish divergences are showing blatantly. Fundamentally, this is the market saying, drive the real interests down since there is no threat of inflation.

We believe, a reality check is imperative here. Stocks rallying on decreasing commodity prices is unsustainable, since there is a fundamental conflict of interest.

On a longer term (a year or so) :-
The US dollar has been rallying based on the belief that the US was first into the recession and the world is lagging 6-12 months behind. And it will be the US bringing the world out of recession. We don't believe this is quite true. The US economy is dominated by consumer spending. The US has proved to be a credit defaulter, with massive writedowns. Consequently, the US will not get loans to consume once again. The world is barfing now because it lent the US economy. We believe the world will come out of it. And ofcourse, credit lenders around the world will continue lending, but only to more credit worthy customers, just not to the US.