In this post I want to present a case for the long side that many people may not even be considering because sentiment is so bearish right now and everbody is uber focused on Dow 4000. Anybody who has been reading zentrader for awhile will know that I’ve been a very bearish for some time, and I’m not saying load up on the long side by any means, but there may be a “trading” opportunity that is upon us. I have a feeling that if we can bring some buying into this market at the beginning of next week, then some of the divergences that I’m seeing may have relevance. It’s always important to look at both sides of the trade.
I must also state, that it would not surprise me in the least to see the markets crater 10-15% on either Monday or Tuesday given the orderly declines we’ve been experiencing. And if that did I’d probably be screaming buy, buy, buy. However there is something to be said when sentiment reaches a certain point, when everybody just assumes the market is going to move straight down into the abyss. Markets do not go straight down, they bob, weave, ebb, flow, and do exactly what you don’t expect them to do. That’s why the majority of people lose money. It’s their expectations of what the market “should do” verses what it does do, that keeps them in losing positions, even when all signs are pointing to sell/cover.
3 points I want to direct your attention to on this chart.
- Trix looks to have bottom and has formed positive divergence against the Dow
- McClellan oscillator has also formed positive divergence and is nowhere near the October lows (not seen in this chart).
- Doji on the Dow candlestick
On a closing bases, above 500 for new nasdaq lows is high. It’s not capitulation high, but it is high as possibly a short term low for the market.
Note the climactic volume in the weekly charts. We’ve just gone through an extended multi-week crash that was very orderly and painful that has zero percent of stocks trading above their weekly 200dma. You can’t go lower than zero.
As I finish this post up I can almost hear the crowd over at SeekingAlpha calling me out because the other day I said there was no good reason to buy any stocks long, and there wasn’t at the time of that post. Being a trader it’s important to notice subtle changes in sentiment, indicators, and charts and sometimes things can change quickly. Other times it takes a few days to even recognize a trend change, or divergences. Sentiment is real bad right now and we’ve had a few days very close together of 90%+ downside selling days. Coupled with a few other indicators and you could easily see a 500-1000+ point rally. In fact, by my count this market could rally to 7046 easily, and still be very technically weak.
The point of this post isn’t to convince anybody to go buy stocks blindly on Monday or to proclaim a bottom. It’s to offer up the possibility that a rally could be coming and to take the necessary precautions to prepare yourself for such an event, such as lightening up on your shorts and/or prepare a watchlist this weekend.
