Please note that despite the recent rally we have not yet established firm control and consistent movement into the upper RSI and Bollinger levels. Still tenous at best here but looking potentially good. Not a good idea to be aggressive on the long side in my opinion. Nimble and careful with stops and trade targets. Please read my post on risk management if you have time and haven't yet. I hold some small long positions but in fact shorted XHB at the end of the day as a hedge and because it has gone up too far too fast in my opinion. I am looking for a pullback followed by consistent behavior.
I want to point out that these, along with the 50/200 moving averages, have been excellent indicators for trading opportunities. In an intermediate term rally (weeks to months) for the market or for a given stock the RSI tends to move between 50 and around 70. We also tend to see movement in the upper Bollinger Band (between the 20 day moving average and upper band). In contrast, during a decline in the markets or in a particular stock we see movement typically between RSI 30 or so and RSI 50.
In a period where the market is trying to reverse course we often see several tests of the RSI 50 region (from above going down when the market is moving from a rally to a sell-off period and from below RSI 50 testing it moving up when the market or stock is trying to move from selling off to rallying for the intermediate term.
Some of the best shorting opportunities recently have occurred when the markets or a stock hit RSI 50 and started to decline back down. Right now we are see many stocks tthat have tested the RSI 50 level several times from below and a few stocks that have already crossed RSI 50 and may be moving up. Also we are seeing some moves into the upper Bollinger Band. This is a potentially very bullish sign for the intermediate term. We are also seeing some higher lows and there are a number of reasons that the touch of the 2002 lows on the SP around 800 may have signaled an intermediate-term bottom in the markets. For one thing, the many shorts have to cover and take profits somewhere and are looking for an exuse to do so. Longs know they are likely to cover and may jump in here. Additionally, Christmas season often brings a rally, the markets have been sold off heavily for quite a while now, and for those who follow Elliott Wave Theory at some point in not too long from now we should expect Wave 2 of primary degree to show up if it hasn't already begun (which I think it has as long as the market moves into the upper RSI range and Bollinger Band). This could be a fairly significant rally that lasts several weeks or even months.
If that does happen I would look at as nothing more than a Bear Market Rally. There is likely to be much more selling to come in this market and the next leg down could surprise a lot of people as to how low the market can go. The depth of this problem is years and years in the making and will not correct itself in one year of market decline in my opinion. A rally here, should it come, thus remains a great time to sell longs if it gets over-exhuberant and a great time to re-initiate short positions potentially. The writing is all on the wall. It's called the charts and it diagrams the only thing that is importtant in the stock market: demand for stocks and the actions, not words, of the market. Right now I am looking at V, MHP, FXI, XHB, URE, in addition to the plain vanilla SSO, QLD, DDM, and a number of others as charts that are starting to look very good here for a rally, while some of the charts that have shown strength during the recent down turn, such as TLH, UUP, and others may be good shorts here, should we move into the upper RSI and Bollinger ranges in the marektsand stick there for a while. If not we could have significant selling as the recent moves up would have failed and could retrace. So I am cautiously optimistic right now but it is also dependent on the very near-term market action imo.
Here are the charts:
Some Potential Shorts?
Some Potential Longs?
"The Yellow Rose Street Beat" is for informational purposes only. It does not give investment advice.
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