• Why We Just Made a Major Bottom

    by  • November 19, 2012 5:08 pm • Broad Market Analysis, Charts to Watch, Quick Hits • 2 Comments

    If you’ve been following me here or on Twitter, then you know I’ve been in the correction camp since late September.  In fact, I asked if we made a major top two days after the September peak and subsequent 8.9% sell off.  From Apple peaking, to small caps lagging, to continued surges in buying climaxes, there weren’t a lot of reasons to be overly bullish in the near-term, IMO.  Don’t get me wrong, there are still many reasons to remain in the longer-term bull camp and I listed 11 reasons recently here, but in the near-term anything can happen and weakness made sense.

    Well, the good news is I think that the correction is over and we very well might rally into the end of the year from here.  First things first, sentiment is a big part of our work here at Schaeffer’s and to me, we’ve gotten way too scared again.  The one thing this market does is scare itself on all pullbacks and once again we’re seeing that.

    Think about this, the recent AAII sentiment poll had as many bears as we saw right around the US debt downgrade in August ’11.  Another way to put it, there is as much fear after nearly a nine percent correction now as we saw after an 18 percent collapse in the summer of 2011.  That is potentially very bullish from a contrarian point of view.

    And let’s talk about this whole fiscal cliff thing.  Is it a big deal?  Absolutely.  None the less, just last week we had a front page USAToday article on it and none other than Bono on CNBC talking about it.  I don’t want to hurt anyone’s feelings here, but if that doesn’t say the market has pretty much priced fiscal cliff in, I don’t know what does.  To me, the much bigger issues are still Europe and more specifically Greece.  Sure, we’ve been rallying for years with those concerns, but they are much more important than fiscal cliff.

    Getting to the charts, back in September near the peak I noted how the SPY formed a ‘shooting star’ formation and this could be bearish.  Fortunately that formation nailed the peak.  Now the good news is once again I think we just made a bottom and candlestick charts are predicting it.

    On Friday, the SPY formed a bullish hammer on huge volume.  This pattern is a one day reversal pattern that occurs when the SPY finishes near the highs of the day’s range, well off its lows.  What impresses me more is Monday’s follow through.  These only work if you see follow through and so far, so good.

    Another nice technical sign we just made a bottom is the SPX had a near perfect 61.8% retracement of the June to September rally.  This is a common retracement and that fact we formed that bullish hammer right there further confirms the odds that level is very significant.

    Lastly, the SPX found support near the ’11 peak.  I’m a big believe that longer-term resistance can in turn serve as support when tested and that again is exactly what happened.

    So sentiment is rather bearish and price action is firming up.  Those are big pluses.  The last major positive that I see is seasonality.  Historically, November and December are two of the strongest months.

    Finally, from the day after Black Friday till the end of the year, the SPX has been up 8 of the past 9 years.  In fact, the past two years we’ve seen gains of 5.7% and 8.5%.  Given sentiment in both of those years were rather low, just like now, if we can get any good news from Europe or fiscal cliff, the stage is set for a nice year-end rally here.

     

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    2 Responses to Why We Just Made a Major Bottom

    1. November 21, 2012 2:45 pm at 2:45 pm

      Thanks for the comments Will. Great points. The short interest data is a longer-term call. I will usually link my near-term concerns in articles that have bigger broader bullish tones. Did that in my early Oct articles that had a bigger bull backdrop. Always good as a trader to have a near-term call, amid a longer-term bias. Definitely still in the longer-term bull camp b/c of anecdotal sentiment and short interest action. None the less, the near-term technicals did suggest some type of pullback in Oct and we had that. Good luck in you trading.

    2. WillTruth
      November 20, 2012 9:01 pm at 9:01 pm

      Correction since late September? C’mon chief. Begining of Oct. $VIX call buying, Short Interest High – Bullish, Why rally should continue? All less than what an honest person with conviction would say about calling a correction.

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