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Dazed and Confused at Trader’s Narrative




Dazed and Confused


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What the heck is going on with these markets? I’m as dazed and confused as anyone else out there. Or maybe more so. Take a look at this intraday chart of the NDX I showed previously:

NDX240min.png

I pointed out before that things looked promising since we had an uptrend in effect with higher highs and higher lows. All we had to do was keep seeing that sort of price action. Not surprisingly, the bulls made a valiant effort at the 1570 level to maintain the uptrend (can you see the range compressing and those two hammer like candlesticks?). Had they won and pushed the index back up, the uptrend might still be in effect. But obviously their effort wasn’t enough as price cascaded down below last week’s low.

So does that mean that we’re now headed for another leg down? Maybe. Take a look at this:

NDXabove50MA.png

This is at the levels of the August 2004 intermediate bottom! But does that mean we’re going to get a bounce here? Not really. When you think about it you realize that theoretically this indicator could go all the way down to zero - and stay there. Of course, for that to happen we would pretty much have to witness Armageddon. I’m not predicting that at all, but it’s helpful to always remember that the market doesn’t have to bounce or do anything you expect it to.

One of the reasons why I’m stumped (more than usual) is that for every metric that I spy, I also notice another that contradicts it. For example, take a look at the sentiment measures: the AAII is whispering sweet bullish tendencies, while in the face of a falling market, the Hulbert newsletter sentiment actually rose from 4.5% to 20.4%. A rise in newsletter bullishness while the market is falling? but the retail investors are wailing and gnashing their teeth!

Remember the beautiful intra-day recovery last Thursday? The one that created that hammer everyone was pointing to breathlessly? Well, it turns out that while the market was pulling itself out of the abyss, Lowry’s proprietary indicator ‘Buying Power’ (measuring demand) dropped to a multi-year low and their ‘Selling Power’ (measuring supply) rose to a multi-year high. So which do you want to believe? the hammer or the lowsy market internals as the hammer was being formed?

Or consider that the odd lot short sales are off the charts - showing that amateur/retail investors are falling over themselves to sell short into this decline. But then consider that according to the latest commitment of traders report, small speculators have a very large net long exposure in the SPX futures.

Huh?

Exactly.

And if you’re ready for another head scratcher, check out this for size: while the COT shows that the commercials are net long the emini (SPX) as much as they were in July 2003… the same COT report shows that for the large futures contract (spoos), the commercials are net short as much as they were in August 2003.

Had enough?

Alright. I’ll leave you to consider those conundrums.

If you happen to crack the code, drop me a comment and enlighten me please.

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3 Responses to “Dazed and Confused”  

  1. 1 Eyal

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    Very interesting. I don’t have sufficient knowledge to be able to compare these stats and indicators to past experience. For example, what did all/most of these indicators show during other times of general market bottoms and.. tops? Maybe it’s common for areas of change of direction to exhibit exactly this type of mixed signals? Not suggesting it is or that this is a bottom, just wondering out ‘loud’ :)

  2. 2 Babak

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    Eyal, neither do I. So until things clear up a bit I’m going to play very light or stay on the sidelines completely.

  1. 1 Move the Markets » Blog Archive » confusing markets


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