Naked Hedge Fund

This week has definitely been a nasty week for the bulls and a great week for the Naked Hedge Fund as stocks continued a slide down into bear territory. We haven’t been below the 200 day moving average since mid 2009. Currently the market is down more than 300 points as Stops are being triggered in every part of the market. The next line of support is at $106 on the SPY, but I wouldn’t be surprised if the bulls try to defend the 200 day moving average by bouncing back through at some point in the near future.

Needless to say we are currently remaining short since our rotation on April 30th, where ….

Today’s bounce back was definitely big in terms of numbers, but not in volume. Also even though it was a big gain it still wasn’t able to break through the current downtrend line. This week will be an interesting battle to say the least. The chart below shows the trendline on a 2 week chart of the SPY.

Just as an update to the previous post about the potential long term resistance that we may be heading into now. Chart below.

The previous post: http://www.nakedhedgefund.com/finance/does-rally-hav…long-term-look/

To say that this market has defied all odds with this huge rally is an understatement. Now one has to take a look at how far we have come and think seriously about how far we can go. Technically speaking there is some significant resistance on the horizon. And in this case the significance is substantial in that these tests only come around every 5 years or so as of late. Below is a chart showing these tests. The chart is a 10 year chart of the SPY sampled at a monthly rate. As you can tell by the amount of time involved in the chart these are very long term trends that are very big and heavy hitters. The market has already somewhat passed the first test of the 25 month moving average, but has the 50 month moving average on the horizon somewhere around $123 on the SPY. The chart explains it better on the full post

This earnings season isn’t working out to well for the market and the big question is if this is going to turn into something more. Obviously the markets have been very overbought and the VIX is extremely low long term as our post noted last week. Today the market confirmed the downtrend that we have been watching and is now at a support level at $112.50. We are going to keep an eye on this support going into the close today and will let you know if we do make a rotation to short. Below are a couple charts for info.

On the post is the earnings chart for Intel. It shows the history of Intels earnings and upcoming expections with the stocks performance during the same period. As you can see in the chart below the earnings difference year over year for the upcoming earnings Thursday could be potentially huge if they meet expectations. The earnings outlook will be very interesting and important for the streets reaction as well. The street expects $0.45 tomorrow evening.

There is an old saying on Wall Street that when the VIX is high you buy and when its low you go. For those unfamiliar with the VIX index it is the ticker symbol for the Chicago Board Options Exchange Volatility Index, a popular measure of the implied volatility of S&P 500 index options. A high value corresponds to a more volatile market and therefore more costly options, which can be used to defray risk from this volatility by selling options. Often referred to as the fear index, it represents one measure of the market’s expectation of volatility over the next 30 day period. So basically when fear is rampant in the market the VIX is high and when its an endless summer on Wall Street the VIX is low.

Below (on full post) is a chart that shows the VIX over a 4 year period. As you can imagine the VIX has been steadily declining since the market rally began last March. The interesting point is that the VIX has gotten so low that it is approaching the low levels pre crash in 2007 and 2008. So will the old saying hold true? Now that the VIX is getting low is it time to go?

Alcoa kicks off earnings tonight. Obviously the industry that Alcoa falls into has been red hot as of late with the falling dollar. It will be interesting to see what the numbers look like. Below is a chart showing the earnings expectations and the past earnings of the last year or so with a back lay of the stocks chart. The year over year comparison of Q4 earnings has the potential to spark a rally based on validation of Alcoa turning the corner from the depths of last March. 2008 Q4 earnings -$0.28 and the expectations for 2009 Q4 is $0.05, which is quite a difference and even more so for next quarter if they set positive outlooks.

SPY has not been making it very easy to be long for a breakout or Santa rally. Below is a chart showing its support and resistance levels going into the last week of trading next week before Christmas.

The stock market is setting up for a possible breakout of a month long consolidation. Below is a chart showing this. We changed our position to long today. (Sold SH at $52.70 and bought SPY at $111.80)