China: Fun Bear Market Rally

The CBOE China Index is above the now rising 20 and 50 day EMAs (blue and red lines). The price is now challenging the down trendline that began in May 2008. However, the market is now overbought and I expect a 'false breakout'. It would appear that momentum will take prices up thru this resistance.

Even as the index hit new price lows at the end of Nov, the MACD did not confirm, foreshadowing this bounce. I last mentioned China in China: “The figures are horrifying.”:

“While the figures may be horrifying, the charts aren’t. The first and steepest down trendline has been broken on the CBOE China Index. Prices are above the declining 20 day EMA (blue line) and up against resistance on the declining 50 day EMA (red line). For the bounce to become something a little bigger and more interesting the pivot high of 355 needs to be successfully challenged.”

On the first sign of weakness I will be exiting my long China positions and immediately flipping short. This is nothing more than a fun Bear Market rally.

Never forget, that the conditions on the ground in the real economy continue to deteriorate rapidly.

The easiest way to trade China is via various ETFs, such as FXI.

McClellan Oscillator, Super Overbought

The McClellan Oscillator hit the highest overbought reading in more than 3 years. Today's reading blasted past even the last record reading of 99.46.

Historically, only the largest spikes presented tradable countertrend opportunities and there was a lag of several days from the spike to the actual turning point in the index. This worked for both long and short trades.

The current overbought reading is higher even than all the readings during the last Bull market...

The best way to use this indicator is in conjuction with a whole bunch more. For example, although the market is off to a Good Start to the Year, Beware the Bear Wedge and notice The Bullish Percent Index, Flashing Warnings Signs.

If you’re thinking, “What the deuce is the McClellan Oscillator?” click here.

Bullish Percent Index, Flashing Warning Signs

The NYSE Bullish Percent Index (BPNYA) has gone from 'holy shit, the world is going to end tomorrow' territory straight back into 'don't worry, be happy' territory. Both are extreme. It does make sense to scale out of those longs established in the last few months of 2008 and to start looking for enticing short candidates.

I said start. The sweet spot on the S&P 500 for index shorts is somewhere between 950 –1000. Individual stocks may present opportunities much earlier. For example I have completely exited my technology and financial long plays today, but still hold at least half of all my commodity plays. As mentioned early today in Oil, Another ‘Trouble in the Middle East’ Bounce I believe that oil itself and by extension various oil equities still have room to run…

The NYSE Bullish Percent is calculated each day by dividing two numbers:

1) The number of NYSE stocks which has "buy signals" on their Point and Figure charts. (P&F? Confused? Click here to get some education.)
2) The total number of NYSE stocks.

Oil, Another 'Trouble in Middle East' Bounce

A bounce to $50 and even $55 isn't excessive. Prices are now above the declining 20 day EMA (blue line) and should gravitate to the 50 day EMA (red line).

This is nothing but a technical bounce that happens to co-incide with the classic 'Trouble in the Middle East' trade. So don't get too excited.

Oil Curve Steeper Than '99 Shows Possible Gain in '09 (Update1): “The steepest plunge in crude prices on record may be setting up oil investors for a rally this year, if history is any guide.

The so-called forward curve of futures contracts traded on the New York Mercantile Exchange suggests oil will rise 28 percent to $60.10 a barrel by December. The curve looks almost the same as 10 years ago, after Russia’s default and the collapse of the Long-Term Capital Management LP hedge fund raised concerns that a global economic slowdown would reduce energy demand. Crude prices fell 25 percent in the final quarter of 1998, the steepest drop in seven years.

Bets on a recovery paid off then as the Organization of Petroleum Exporting Countries cut production 6.9 percent, causing prices to more than double in 1999. Now, OPEC is pledging to reduce supply 9 percent, companies from Royal Dutch Shell Plc to Valero Corp. are postponing new energy projects and central banks are cutting interest rates to end the worst financial crisis since World War II.”

The first Fib is far far away at around $77 and prices would likely require one hell of a geopolitical catalyst to get that high... Israel slapping Gaza around just isn't that catalyst.

Oil Rises a Third Day; Gaza Attacks Threaten Mideast Stability: “Crude oil rose for a third day after Israeli troops entered the Gaza Strip, escalating the conflict and threatening stability in the Middle East, the largest oil- producing region.

Oil gained after thousands of Israeli troops crossed the border on Jan. 3 to capture bases that Hamas militants have used to launch rocket attacks on the country. Saudi Arabia, which last month announced with fellow OPEC members the group’s biggest ever production cut, raised the price of all the crude types it exports to the U.S.”

Another way to play commodities of course is via the Canadian equity index or the various Canadian ETFs.

Canadian Stocks Have Best Start Since 1977 on Commodity Rally: “Canadian stocks notched their best first day of the year since at least 1977 as commodity producers rallied from last year’s record drop on higher oil and metals prices and prospects that government spending will spur demand.”

Good Start to the Year, Beware Bear Wedge

In an excellent start to the New Year, the NYSE Composite (NYA) broke up thru both the last swing high and the now flat 50 day EMA (red line). The last few days of 2008 included both a Major Accumulation Day (Dec 17th, 2008) and a small cluster of ‘minor’ accumulations. Volume remains anemic and needs to pick up quickly to validate this bounce.

We could easily bounce to one of the first Fibs and 'undo' the forced, panic liquidation of the last few months of 2008 (Oct, Nov).

Beware, that this rally is already looking like the notorious Bear Wedges that occurred frequently throughout 2008.

Related Posts:
Bear Wedge: Breakout
Equities: Bear Wedge, First Cracks
Equities: Bear Wedge, Overbought, Looking Weak
Another Bear Wedge, Financials Overbought
Bear Wedge Breaks, Goldman, Lehman, Merril, Morgan: Cut to SELL
Cracks in the Bear Wedge