Friday, June 7, 2013

Shorts were on the ropes at Thursday's close and unlikely to escape a bludgeoning when stocks begin to trade this morning.  Under the circumstances there is little to predict, and perhaps even to trade -- especially since the pullback from yesterday's high has been micro-shallow so far (see inset).

My bear market target at 135^05 is well below these levels, but we're still on the lookout for signs that the Fed will step in -- as they always have in recent years -- to reverse price erosion before investors hit the panic button. Signs are ever-so-mildly bullish with the impulse leg generated yesterday on the hourly chart. The pullback shown low may not hold, but if does we should look for a thrust to p=142^04 at a minimum, or to D=143^07 if any higher.  The move could conceivably set up an appealing bull play for camo traders once the entry signal is tripped, but you may need to zoom down to the 15-minute chart or less to keep risk down to a four-tick minimum.

Although our technically derived target for the Dow is still a very bullish 16800, we wrote here recently that we were keeping one foot out the fire escape.  Given yesterday’s display of bravado on Wall Street, however, we’ve now put the other foot out as well. After being down 116 points, the Industrial Average rallied nearly 200 points to end the day 80 points higher, at 15040.  We had anticipated the initial weakness with a bearish forecast for Thursday of a 15-point drop in the E-Mini S&P futures. This equates to a Dow fall of about 120 points.  At the lows, which occurred midway through the session, both came close to hitting their respective targets. Although the rebound therefore came as no surprise, the relentlessness of it did. After bottoming, the broad averages ratcheted steadily higher for the remainder of the session, strongly suggesting with each new upthrust and shallow pullback that the rally was being driven solely by short covering. If so, bears will still be on the hook when stocks begin to trade Friday morning. We’ve told subscribers to be ready to short into whatever illusion of strength a bear squeeze might create, so convinced are we that the insanity that has been goosing shares has reached an unsustainable extreme.  There were plenty of reasons for the broad averages to have exceeded our downside targets yesterday and kept going.  For one, the U.S. dollar was in the throes of its worst day in recent memory. This suggests that at a psychological level, at least, all was not right with the world. Couple that with the horrific slide in T-Bond prices over the last month, and the very sharp, upward skew in mortgage rates that has resulted, and one could almost believe the Fed is starting to lose control.