alice

NFTRH; Bounce? (medium priority)

Nothing goes straight up or straight down. The odds that we have at least entered a cyclical bear market that could bring SPX to the 2100-2200 major support area have increased. But even if so, bear market bounces can be some of the most violent affairs.

So let’s take a look to see if this morning’s firm pre-market may have the elements to spark a hard bounce (which could become the first post-breakdown short setup, eventually). Please consider reading Rob Hanna’s post at Biiwii this morning…

Elevated CBI and New SPX Low Carry Bullish Implications

Rob digs up historical facts. History does not need to repeat and all too often in this market it has not repeated (whether following a supposedly bearish analog or a bullish one). But the historical numbers are facts, and they are bullish from 1 to 20 days out per his Capitulative Breadth Index (CBI).

As noted in the Trade Log, I will probably use index ETFs more than individual stocks if/as I come to firm a bearish view (to SPX 2100-2200, which could actually be a firm buying opportunity one day).

Conditions that make me hesitant to have conviction that this morning’s pre-market bounce is the bounce is that too many stocks never capitulated. In fact, current shorts I hold (pending a real bounce scenario) FTNT, BSX and CSCO each only just started to break down from upside tests of their 50 day averages, and if SPX is on a ‘C’ leg down, as it appears it is I am aware that ‘C’ legs are usually where the worst damage occurs. This one may not yet have reached max pain.

So I respect Rob Hanna’s quant on the situation but reserve some doubt about whether this will be the bounce (which will surely be coming at some point) just yet.

Moving away from the immediate, here are the reasons I think the odds of a bear cycle have increased, per the weekly charts. The main indexes are still barely at higher lows, but SOX and RUT appear broken, bounce or no bounce.

No sectors other than possibly Healthcare look firmly intact. Some key areas are breaking down, bounce or no bounce.

Within H/C, Medical Device is at what we had previously noted could be a buying opportunity. It’s an over valued sector for a traditionally ‘defensive’ one (medical device/equipment companies are traditionally less cyclically sensitive) and bear markets address valuations. So there’s that. The others are either intact, barely intact or rolling over.

Bottom Line

A quant who specializes in defining conditions (historical facts) for the market’s bull and bear swings has registered a capitulation worthy of a strong market bounce. I have my doubts about whether this bounce is the bounce, but the risk of a hard bounce is very high now.

As a result of the technical damage (as only one example, SPX is below its daily SMA 200) done to many indexes and sectors the odds of a bear cycle (with potential to SPX 2100-2200) have increased. So the bounce – when it arrives – maybe be playable from a bullish perspective, but pending the conditions we’ll review all along the way, it could be even more playable from a bearish perspective after it plays out.