Thursday, February 21, 2008
Early Signs
by David Yu
I'm under medication for this nasty flu that's been going around, so I'll have to make this update very brief.
Although today's session opened on a high note, the Up Volume of the Nasdaq (blue line on Chart 1) began to slide immediately after the opening bell. The Trin Index (red line) also started rising from the get-go. It proceeded to move above the dotted 1.00 neutral line and above the Advancing Volume convincingly at around noon time. Remember we don't want to see the red curve on top of the blue curve or above the neutral line. The fall of the Up Volume and the rise of the Trin within the first half hour of trading provided an early warning signs of things to come. But, they're not the only ones.
Chart 1
Bond investors also went for the safe haven of government debt first thing in the morning. The Yield on the 10-year Treasury Note gapped down (blue dotted arrow on Chart 2) precipitously from yesterday's closing while the stock market gapped up (red dotted arrow). And, money continued to move out of the stock market and into the government bonds throughout the day. This was the exact opposite of yesterday's action.
Yesterday morning, the heavy sell-off caused the yield on the 10-year T-note to gap up. The equity market initially fell sharply, but money rotating into the equity market from bond investors eventually rally the S&P 500 higher.
Chart 2
Everyone attributed market's change of course today to the minus 24 reading of the Philly Fed's February regional manufacturing survey, which was released at 10:00 am, but technical evidence told me that the fate of the market had been mostly determined right from the start.
Keeping a close eye on the intraday correlations between the Up Volume and the Trin as well as the T-note Yield and the S&P 500, I went ahead and wrote (sold) some QLD (Ultra Long QQQQ ProShares) March $75 call option for $2.30 and bought them back in late afternoon for $1.80 -- a 27% quick profit (see ledger below).
I felt a lot safer taking the profit because today's equity sell-off on low volume appeared to be overdone. The Volume and Trin indicators on Chart 1 told me so. The large gap at the end of the session between the Up Volume and the Trin indicates a statistical deviation from the mean. And the reversion to the mean should take place imminently.
The reversion may come tomorrow, Friday, but it'll probably be more like another typical boring, low volume Friday. Well, it gives me a chance to get more rest. That's it, folks. I'm not sure if I'd be well enough to write anything this weekend. I'm wishing all of you a HEALTHY weekend. Walk, no, run away from people that are coughing or sneezing.
email: dyuguard-2@yahoo.com