“What We Have Here is Failure to Bounce”

My goodness, that was another brutal selloff into the close, wasn’t it? In both the hourly and the daily time frames, the stochastics are so oversold that they’re in danger of falling off, but there is nothing as yet in the vertical bar patterns to suggest an imminent reversal. In fact, on the hourly chart shown here, we closed with what Todd classifies as a “Bearish Outside Vertical Bar”, which is, as the name suggests, not a very positive sign for future price action. We know that at some point the selling will be done, but it was intense at times again today, particularly in the final hour.

There are always fundamental reasons for a move, but other fundamental reasons can be found for moves in the opposite direction, as well. Today, in fact, the ISM factory index for September, which had been rumored to be considerably weaker than the consensus 50.5, actually proved to be stronger, at 51.6 from an August reading of 50.6 due to growth in exports. This gave stocks a nice spike at 10 AM EDT, but the move faded quickly. Greece, and the implications for banks’ capital adequacy, continues to loom large, but it hardly seems possible that anyone is still uncertain as to whether a default is on the cards. Still, apart from the oversold condition, there don’t appear to be a lot of potential positives on the horizon. Apple will presumably unveil a new line of iPhones tomorrow, normally a positive, and earnings season is approaching, which might be constructive overall,  but perhaps not.

If the persistent market rumors are true, large hedge funds are being forced to unwind long stock and index positions. For what it’s worth, I’m skeptical. If funds were liquidating, I would expect to see rallies sold into, as occurred this morning, but the selling that gets harder as prices come lower suggests mechanical trading to me rather than forced liquidation. If I’m right about the source of a good part of the late day selling, there will be trailing stops that can be triggered, resulting at some point in a nice rally. As I mentioned, however, there isn’t as yet anything in the vertical bars to suggest that tomorrow will be the day (although, since the market is a contrary beast, it might), and stochastics aren’t all that helpful for the timing of reversals.

Thus far this evening, all I’m seeing is red out of Asia, although that doesn’t necessarily tell us how U.S. markets will open tomorrow. I continue to look for a tradeable bounce, but that didn’t work out for me today. It wasn’t too late to short, after all, and we’re still well above zero. Best of luck tomorrow.