Thursday

Decoupling of Markets

Post a Comment February 19, 2009 – 12:26 am |   | Permalink |  Print This Post |

The Dow Jones closed below November lows, registering a lower low on the daily charts exactly as we predicted on our previous post. We had an order to open at 7480 for $5/point - picking the bottom by 2 points (low was 7473+4 spread = 7478). 

It is more likely for the market to close at a level below 7550 for it to be registered on the daily charts

Whilst Dow Jones have gone lower than November lows, other markets remain very resilient. China H-shares is almost 40% above November lows. Whilst this is fundamentally supported, we feel that in the short term, such large discrepancies should close up. We are still in the process of studying the historical relationship between Dow Jones and the rest of the markets to exploit this discrepancy.

Whilst we are not out of the woods as we have just broken the golden rule of technical analysis (fighting the trend and opening a long when markets made lower lows), we are happy with our small position. If markets go above our entry point significantly, we should put a profit protect (or at least a stop at entry point). We feel that markets may turn anytime now. Tonight. Tomorrow night. Of course, the risk is markets falling another 500-1000 points acutely before turning. We do not see that happening. And if it does, we will fire more longs. Our emotional indicator of our degree of leverage is still within our comfort levels - yes we are hoping for markets to fall. Our oil indicator, however, suggest that markets may have 2 more nights before turning - the US Light Crude oil March contract is expiring on the 20th Feb - suggesting that markets may fall further to give oil manipulators “an excuse” to short oil to squeeze the bulls out. Our previous observations show that it is not uncommon for oil to be down 5% on the day of expiry (in the matter of hours), and then do a complete reversal to close up 4%. We plan to hold our contango all the way to the end.