The Wisdom of Solomon (TLT)
You’ve been listening to the car rattle and shake for some time now, but it still moves OK, and everyone tells you what a fine looking beast she is and how she’s reliable and all, so you let it go.
But the noise is bothering the wife a little too much to maintain peace in the castle, so in lieu of letting her fears fester and risk an outright coup, you take her to the shop.
The car, that is.
You shimmy on down to the local industrial zone, and, as usual, Sonny is all smiles and handshakes, the black under his fingernails a tad worrisome as he takes the old Edsel for a spin to check out the damage.
And whaddaya know, it’s not much of a thing at all. Streering fluid’s low and there may be a bit of a leak from the pipe leading therefrom, but when all is said and done, it’s only a half day shot and 180 bucks, and you’re back on the road a’smilin’.
Modern Day Financial Proverbs
We offer the foregoing as a perfectly relevant allegory for the current state of the market.
It’s like this. In case anyone missed it, the equity market has begun a long anticipated turn-over that we expect to last a few weeks, at least, and bring the indexes lower by anywhere between five and twenty percent.
Yeah, yeah, we know, it’s a range that’s anything but exact, but these things are never preordained, and the truth is, predictions are more akin to skeet shooting than blowing Coke cans off a stump.
That is to say, a retracement in a bull or bear market is always a moving target, and has everything to do with sentiment levels and nearly nothing to do with math. So as we approach a logical support level, whether the market bounces is entirely dependent on the fear investors are experiencing at that point. If it’s robust, the index will, indeed, bounce. If it’s fleeting, the decline will continue until the next level of support is reached.
Let’s look now at charts of both the Dow and the Transports to get a feel for the market’s next possible line of support level.
Moving forward, we’ll also be able to employ Dow Theory as a means for measuring whether the market has indeed entered a new secular bear phase, or if we’re just into the mechanic for a few hour’s work.
Have a look first at the Dow –
- As of this writing, price has cut sharply below the short term moving average (red line), and it’s clear momentum is downward.
- The lengthy RSI overbought condition has broken (in green), and the indicator has shot dolphin-like below the midway waterline, while MACD has also crossed lower.
- Volume is picking up (black box).
- The next line of support after the short term MA is the all-important 137 day moving average, currently at 23,500 and rising (blue).
Our considered opinion as to near-term direction for the Dow is as follows –
First, we view the latest action as near term bearish, and see the possibility of some play at current levels as traders mull whether the short term moving average at Dow 25,600 (red line) will offer meaningful resistance. That is, we could well see a rise to that line as traders attempt to gauge the real strength of the selling.
Our own thinking is that resistance will hold, and within the next two weeks we’ll see a test of support at 23,500. Beyond that, as we stated above, it’s all a matter of sentiment.
And our outlook is supported by action in the Transports.
Have a look –
As you can see, the trannies broke down far before the Dow. Whereas the Dow topped out just six trading sessions back, the transports hit their highs a full three weeks ago, and, as we pointed out at the time, a powerful Japanese candle formation then signaled an end to the bullish move in the DJTA (red circle).
Fellow Norman Matt McAbby reported it all to you in an article called Don’t Look Back that reached your inboxes on January 25th. There, he wrote –
That was written at DJTA 11,200.
Today we’re sitting at 10,350, and it appears there’s more to come.
RSI for the Transports is fast racing below its waterline, while MACD is just days away from doing the same.
Conclusion: the bottom’s not yet in.
And that leads us to a worthy trade for the near term.
You got it, gang.
This week’s trade is based on the flow of funds that we’re currently witnessing as the market begins its first swan dive of the last few years.
And as you might expect, the most intriguing redirection that we’ve witnessed occurred between the stock and bond markets.
The selling action of the last week brought the price of the long bond down appreciably, but as the selling in the equity market accelerated on Monday, the bond market made a powerful reversal, and we believe a widespread safe haven operation has now begun.
A look at the chart offers an indication of just how far the trend might carry.
This is the last half year of the iShares 20+ Year Treasury Bond ETF (NYSE:TLT) –
In what appears to be a mirror image of the bearish candle pattern we saw on the Transports, the long bond is apparently now in the midst of a near term swerve higher. The bullish engulfing pattern (in blue) is textbook. And the volume surge (in black) adds weight to the indicator.
We would note that the longer term trend in bonds may be lower, but for now, we’re confident that a safe haven bounce in the Treasury market is underway.
And a rise to 124 could happen quickly.
And that’s why…- Content protected for Normandy Executive Lounge, Wall Street Elite, Executive Lounge members only]
Wall Street Elite recommends you consider buying the TLT May 19th 124 CALL for $1.64 and selling the TLT May 19th 117 PUT for $1.49. Total debit on the trade is $0.15.- Content protected for Normandy Executive Lounge, Wall Street Elite, Executive Lounge members only]
With kind regards,
Hugh L. O’Haynew