Naked Hedge Fund

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.

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?

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)

Naked Hedge Fund Weekly report. PDF on post.

The uptrend has been our friend lately as we have ridden the daily stochastic up from the pullback. Todays breakout could lead to more highs in this stairstep pattern, but there is some long term resistance ahead to consider. Below is a long term monthly chart of SPY marked up that shows the 25 and 50 moving averages with slow stochastics. This shows the potential crash course around the 111-112 range on the SPY. Also around this same level is a 50% Fibonacci retracement from the March lows… The ETF Corner does a good job showing this chart at ETF Corner Link .

This all may seem like hocus pocus voodoo $@$% to most of you and a lot of times it does to me as well, but you have to consider whose trading out there. Its not people trading out there anymore, the majority is programmed computers. This is not our grandfathers market where people buy a stock because they believe in a company and invest for years and years. You do that these days and you will give it all back and then some. Being a computer programmer definitely has helped my thought process when approaching the markets. Algorithms are unemotional mathematical beings (I say beings because they are there… making the trades) and when certain numbers (triggers) are included in the program and in the back of the minds of millions of human traders things can happen. So technicals as silly and far fetched as they seem do play a role that at least deserve consideration when investing.

Obviously the market has been changing its tune lately from being overly optimistic and applauding all shapes and sizes of earnings to now dumping on most news even when it could be construed as a positive. This only further proves that the market reaction is what matters not so much what the numbers are that come out from an economic or earnings perspective. For example the market had risen 60% from its lows on better economic and earnings data even though if you take a step back and look at the big picture the numbers are still relatively bad.

So maybe the market may finally correct now. This correction has been touted since the week after the “bottom” (March 6th). So in a lot of people’s minds this is looooong overdue. To us it doesn’t matter what people think only what the market thinks. This is why we were able to catch a large chunk of the rally from March. Recently the market has head faked us and others into going on the short side only to reverse and cut out a portion of our year-to-date gains.

So will this time be different? We have been short since this past Monday when the downtrend was confirmed with an ugly midday reversal. So far it has worked out well, but could this be another head fake? Currently we are right on the 50 day Moving average of the S&P 500 (SPY) and this is where the bulls usually flex their muscles. But somethings to note for the bears defense is:

* Leading stocks such as the financials (XLF) and small caps (IWM) have broken down through their 50 day moving averages already.
* Below the 50 day Moving average on the S&P 500 there is very little in terms of support. (Support chart below)
* Long term technicals are overbought and have potential for large correction (Monthly chart below)