After gyrating much of the day, the S&P500 bounced off the the 200-day moving average (which also coincided with the December 2010 close)  just like a page out of a technical analysis textbook.   The bounce helped rescue Apple from some very ugly price action, which pierced its 200-day moving average for the first time since September 2008, x/ the flash crash, trading down to $318.33 before recouping most of its loss with a strong close.

If the “new economy” lead by Apple rolls over,  the global markets are in for world of hurt. The tech sector is becoming impatient and in need of a new burst of innovation in order to get  lathered up and spark a new rally.   The upcoming earnings season will also be a key test to see if the strength of the corporate sector can chase away the flock swans currently weighing on the markets.   The perception of “good micro/bad macro” is one of the reasons why markets aren’t down even more, in our opinion.

A test of a market in distress is the health of the first bounce.  We’re going to give this one some room while keeping one hand firmly on the rip cord.  The flock of high impact McSwans currently converging on risk markets is a scary proposition and those who should have sold or got short probably already have.   Furthermore,  the U.S. equity market does feel a bit, at least to us,  sold out.

As the markets obsess over Greece, which has clearly priced a default,  we’re more focused on the “blind side” as the Hang Seng and the Shanghai break support and continue in their death spiral.   A fairly bumpy or hard landing in China is not priced, in our opinion, and if equity premiums continue to blow out in both of these markets, it would signal a higher probability that the negative case is going to be realized.

Markets price perception before reality and the trick is not only to determine the probability of the perception becoming reality, but also to assess if a potential state of reality is perceived and priced into the markets.    Cheerleaders will always maintain the negatives are priced and have a stronger case for their argument if there is only one major issue weighing on the market.

But the current environment is much more difficult to navigate,  where a flock of macro swans — including European Debt, China hard landing, the QE2 endgame, Japan supply chain issues, global economic slowdown,  natural disasters, and commodity price inflation –  are batting the market around like a piñata.  This, therefore,  warrants more caution and greater risk mitigation.

Anyone who maintains with certainty where we’re headed should be willing to lend you their yacht for a nice Caribbean vacation/cruise.   And don’t those doom and gloom talking heads sound like annoying fax machines?   We have to shut them off even if they may have some valid points.   Stay tuned and remember the 11th Commandment:  those who remain flexible shall not be broke(n).

Category: Technical Analysis

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5 Responses to “Textbook Bounce Off the 200-day Moving Average”

  1. Mike in Nola says:

    While I think whether tech analysis works depends to a large extent on the fact that many people trade based on it and it becomes a self fulfilling prophecy, you have things about right.

    Only quibble would be that since Ben has pumped up the markets, there could well be a lot of the unsophisticated back in who still will have time to panic if things get worse.

  2. keithpiccirillo says:

    Kudos to those who had the long AAPL/short RIMM pairs trade.

  3. Petey Wheatstraw says:

    “Markets price perception before reality and the trick is not only to determine the probability of the perception becoming reality, but also to assess if a potential state of reality is perceived and priced into the markets.”

    This comment seems to relate, somewhat, to your recent post on truth.

    Reality is the truth, and it will trump belief, perception, and attitude every time. It might take a while to become undeniably apparent (as with the period of time between falling off a cliff and hitting the ground, or visiting a leper colony and developing symptoms of the disease), but reality IS, eventually, the truth, and dishonesty and/or a positive attitude cannot alter it.

    The reality of our common situation — especially if one accounts for all of the tangential but easily ignored aspects of it — is that we haven’t effectively dealt with what we know to be true/real threats. Even worse, we have embraced multiple dishonesties and acted on them as if they were the truth.

    Just because the truth of our falling hasn’t risen to meet and crush us, doesn’t mean we’ve suddenly evolved wings and can fly (even if you do have a textbook that shows that birds evolved wings).

    Call me a perma-bear or a pessimist (and I acknowledge that if one predicts the end for a long enough time, that eventually they’ll be right), but the reality is that we have already fallen (or contracted leprosy), and the course of real events has only one conclusion.

  4. honeybadger says:

    “batting the market around like a piñata”

    When the piñata breaks, doesn’t it spray little candies all over the floor?

    How many more wacks with the bat before this baby splits wide open?

  5. Petey Wheatstraw says:

    Look! That piñata is full of bees!

    honeybadger don’t give a shit!

    honeybadger is hungry!

    honeybadger will slap the shit out of that piñata!

    Oh look! Honeybdger is eating bees!

    He don’t care!

    He don’t give a shit!