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Bring on the Right Shoulder!

Submitted by madhedgefundtrader on 06/03/2010 09:25 -0400

That is the refrain I am hearing from a number of technical analysts this morning. They believe that last week’s dead cat bounce in US stocks was nothing more than short covering ahead of the three day Memorial Day weekend and month end window dressing.

The surge is setting up a classic “head and shoulders” top, with the left shoulder made on January 18 at 1,150, leading to a head at 1,220 on April 25. Where is the right shoulder? Worst case, we only get back up to the 200 day moving average at 1,105. Technical perfection is reached at 1,150, and the best case scenario takes it up to a double top at 1,220, which I would be amazed to see in the face the deteriorating global fundamentals. It could take several weeks or months to get the right shoulder, but not later than end summer.

For “tells” on which scenario is going to play out, and how long it will take, watch NASDAQ, which put in the most technically rigorous bottom last year. You can also watch pathfinder stocks like Goldman Sachs (GS) and Apple (AAPL). Another aid will be the euro/yen cross, that great indicator of global risk taking. If it breaks to new lows below ¥109, head for the hills.

There may be a long side summer trade in stocks for the nimble, but let’s face it, the next big move in stocks is likely to be down. The wild card is the nonfarm payroll coming on June 4. Anything short of the 500,000 blockbuster number some analysts are expecting could tank the market.

Once the right shoulder is in, I expect a spiral dive down to my downside target of 9,000 in the Dow and 950 in the S&P 500, which are big Fibonacci numbers, and a neat 50% retracement of the move up from the March, 2009 low.

How Overvalued Are Stocks? The chart below was passed on to me by a reader showing an inflation adjusted Dow since 1900. Bulls may be forgiven for getting that kicked in the scrotum feeling because it shows the index is 3,000 (43%) points higher than trend.

I can buy the argument that a surge in stock prices which started in 1990 was brought on by the rapid diffusion of first computers, and then the Internet, during that hectic, volatile decade. The only explanation I can think of for the past decade is artificially low interest rates, which we still have.

Moral to the story: watch out when those low interest rates depart for other regions. Reversion to the mean can be a bitch.

To see the data, charts, and graphs that support this research piece, as well as more iconoclastic and out-of-consensus analysis, please visit me at www.madhedgefundtrader.com . There, you will find the conventional wisdom mercilessly flailed and tortured daily, and my last two years of research reports available for free. You can also listen to me on Hedge Fund Radio by clicking on the “Today’s Radio Show” menu tab on the left on my home page.

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Thu, 06/03/2010 - 15:31 | 392512 dcb

yesterday 15:30 at resistance buying (painting the tape) I think you will continue to see this. nobody except the big boys would be buying then because they know nobody will stop them.

I have buy stops in place, but am a bull. remember you have elections in the fall, and if they drop the market now the whole ponzi scheme fails. they just aren't going to let that happen.

the banks will be taking write downs they can't manage, the goveernment has bank stocks to sell. etc. NO

Thu, 06/03/2010 - 13:49 | 392268 dcb

I just can't believe the government will allow goldman to drop the market so early in the game.

Thu, 06/03/2010 - 13:29 | 392196 mkkby

I never read MHFT's garbage. Just wanted to comment what an asshole he is to be bullish one day and bearish the next. Glad you're not managing my money.

Thu, 06/03/2010 - 15:13 | 392467 beastie

It would be nice if before you are allowed to post an article that you have

state up front where you stand short, medium and longterm. Those stats would be collected

stats would be up there for all the world to see and if you are wrong or right.

No bullshit about IF this happens or that happens in the opening statement and if you were wrong in a previous article state it and why you think you were wrong.

Here I'll go:

Short term (this week) UP. (becasue the job numbers will be cooked etc)

Medium term (this month) UP. (it will complete a TA's wet dream)

Long term (3 months) DOWN. (eventually reality will catch up to the markets)

Longer term (November) Big down after the elections

As professional writers all should state exactly what those numbers should be.

It's not a bad thing to be wrong but it's a bad thing to submit multiple articles with

completely different predictions in the space of a few days. While I'll agree only fools never change their minds there is an IF with this statement. Only a fool can change their mind and pretend their previous position never existed.

The IF's, buts and caveats can be highlighted with an asterisk.

A simple template for sumission would suffice.

Thu, 06/03/2010 - 13:10 | 392133 Robslob

Just buy those tech stocks damnit so Leo and madhatter can get out then predict to us how much lower the market goes so they can pick them up on the cheap again...

Credit contraction is a nice way to say deflation to a credit driven economy...

Thu, 06/03/2010 - 13:00 | 392113 Tripps