6.24.10 – Red Over Red, You’re Dead

Pilots landing a plane in weather where there is a low ceiling (the bottom of the clouds is close to the ground) or at night utilize a system of lights on the side of an airport runway threshold to provide visual descent guidance information during the approach to a runway.  This lighting system is called VASI (Visual Approach Slope Indicator) and it consists of two sets of lights.  Each set of lights is designed so that the lights appear as either white or red, depending on the angle at which the lights are viewed. When the pilot is approaching the lights at the proper angle, the first set of lights appears white and the second set appears red. When both sets appear white the pilot is flying too high and will “overshoot” the runway; when both appear red the pilot is flying too low and will crash short of the runway.

Training for a pilots license includes night flying and that means learning how to “read” and interpret the VASI lights.  My instructor told me to remember the following: “White over white, fly all night.  Red over red, you’re gonna be dead.”  That’s what the market felt like today because every time it tried to stage a recovery it was met with selling. My quote platform, like most, displays price data in either black (up) or red (down).  I saw a lot of red on the screen at the close – red over red, you’re dead.

The Dow tumbled 145 points today to close at 10,152.80.  The S&P 500 Index fell 1.68% and the Nasdaq Composite lost 1.63%.  The Big Three  indexes have now pulled back after failing to punch through their respective 50-day SMAs and are below their 200-day SMAs again.  Support for all three are their respective double bottom lows made on May 25th and June 8th.

You pick the inverse ETF or ETN and it made some nice gains today: FAZ, the 3x leveraged inverse financials ETF, climbed 6.11%.  SDK, the leveraged short Russell Midcap Growth ETF rose 5.22%.  SMN, leveraged short basic materials, rose 5.09%.  SSG, the leveraged short semiconductor ETF has been trading sideways for almost seven weeks; it’s moving back toward the top of its range with a gain today of 4.92%.  Please click on the symbols for details.

VXX, the S&P 500 Vix Short-Term Futures ETN discussed in yesterday’s blog, rose 6.14%.  It halted at a descending trendline that happened to coincide with the 38.2% Fibonacci retracement level.  Please click on the chart to make it full-screen:

Should VXX close above the resistance line then a test of the 50% retracement level – and lower stock prices – is likely.

There was something going on today that at first I thought might have been a bullish divergence between stocks and bonds but now, I believe my initial thought was incorrect.  As a rule of thumb, bonds and stocks move opposite to each other.  Bond yields tend to rise when the market is rising, as asset allocaturs and others find stocks offering a better risk-adjusted return.  Since price ultimately is determined by supply and demand, if the demand for bonds drops because money is flowing into equities, the price of bonds will drop/yields will rise until prices are low enough/yields are high enough to attract the allocaturs again.  Think of it like a department store trying to get rid of out-of-season merchandise – they keep dropping the price until the bargain hunters start buying.

With the market down this afternoon I was expecting to see bond yields moving down as well, but that wasn’t the case.  TLT, the 20+ Year Treasury Bond ETF, fell .59% today, which means yields went higher.  That made no sense to me until I realized what’s probably happening was with the end-of-quarter window dressing going in, portfolio managers are throwing out their losing stocks but hording cash, not going into bonds.  That could have bullish implications for July.

While I still see the equity indexes as being in the middle of an ABC pullback (see the June 21st blog for a description), it wouldn’t be the first time I was wrong and the market starts rising again.  If that turns out to be the case then SDY, the S&P Dividend SPDR, is one ETF worth watching.

The weekly chart shows SDY pulled back 38.2% of the rise it made between March 2009 and April 2010.  Since then it has formed a symmetrical triangle which attempted a breakout on Monday but has pulled back to the rising support line:

Note the stochastic indicator.  It has made a bullish crossover (the light blue line crossed over the red line) around 48 and it had started higher when the rug was pulled out of the bottom Tuesday and today.  The weekly stochastic indicator is still bullish, which is surprising.  SDY even pays a respectable dividend of 3.6%.

I’m seeing more and more evidence the market is flying red over red.  Let’s hope it corrects this condition before it’s dead.

About Dave

David Steckler enjoyed 24+ years of experience as an investment counselor and portfolio manager before retiring. A former professor at Lindenwood University in Missouri, he also was a member and past president of the American Association of Professional Technical Analysts (AAPTA), and a member of the Market Technicians Association (MTA).
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