Battling Bulls

“Having nothing, nothing can he lose.”

-William Shakespeare

 

That quote comes from the battle of all Shakespearean battles. “Henry VI”, Part 3 contains more battles than any other Shakespeare play. Yesterday was a big Bull versus Bear battle. And I lost.

 

No matter where I go this morning, the War of the Proverbial Roses will carry on. A battle lost doesn’t lose the war that we engaged in on the short side at April’s end. If the bulls think I am going to rollover or point fingers today - think again. I’m accountable for this team’s losses. I’m moving forward.

 

Before we move forward it’s important to take the time to look back. What risks are embedded in the setup for today’s battle given yesterday’s closing prices? What calendar catalysts are in front of us?

 

The good news is that we called for our own fall in an intraday note yesterday titled “Squeezy: SP500 Risk Management Levels, Refreshed.” Good news because it’s better to understand why you are losing than living in fear of your process. Have a plan - change the plan as prices change.

 

The most important part about yesterday’s price action was that the immediate term TRADE in price momentum and volatility turned positive for US Equities. We use a simple 3-factor model to measure all durations in our model dynamically: Price, Volatility, and Volume. The third leg of this stool (volume) did not confirm price and volatility, but there really are no buts – the closing price of the major indices are what matter most.

 

From an immediate term TRADE perspective (3-weeks or less), here are the new lines of support:

  1. SP500 = 1101
  2. Dow = 10,299
  3. Nasdaq = 2276

There are some critical strategy points to be made here.

  1. When TRADE lines of resistance become support, you need to change the immediate term plan (stop selling aggressively).
  2. TRADE lines of support can quickly become resistance again, so you need to be patient in watching prices confirm new support.
  3. TRADE lines are not TREND lines. Never confuse the immediate term with intermediate term durations.

This is where the battle becomes the war - when there is Price Momentum Mismatch between durations (i.e. the TRADE goes bullish within a bearish TREND). So the next leg of analyzing yesterday’s losses on the short side becomes looking forward to the forest of where the real risk in staying short can be found.

 

From an intermediate term TREND perspective (3-months or more), here are the lines of resistance:

  1. SP500 = 1144
  2. Dow = 10,698
  3. Nasdaq = 2369

Once again, no matter where you go this morning there those real-time prices are – sitting right in between a rock and a hard place of bullish TRADE and bearish TREND. I’ll be selling on rallies toward 1144 and buying on selloffs toward 1101.

 

How about today? What is Thunder Bay Bear who is Battling Bulls to do?

  1. Watch and wait like we did into yesterday’s close.
  2. Don’t run out there and get emotional, flailing your rifle and shooting at any bullish price that moves.
  3. Watch and wait some more…

The way I look at it is that both my fundamental Fiat Fool macro thesis and my quantitative setup continue to confirm one another for both the intermediate and long term. To a degree, some of the wins I’ve had this week (short the US Dollar, long Gold) continue to confirm the same. The US government is inching toward the Road to Perdition that the Europeans have already started to march upon – austerity.

 

The #2 story on Bloomberg this morning is born out of the same source of every government oriented story that ends up in your inbox – a leak – “Fed May Trim Growth Outlook”…

 

Make no mistake, no matter where the immediate term TRADE in this market goes, this is where the real intermediate term war between Bulls versus Bears will be decided – will US GDP growth be slower or faster than consensus expects in 2011?

 

We’ve been saying Bernanke and the Administration’s growth estimates for both Q4 2010 and all of 2011 are way too high. Apparently the bulls in the Fiat Fool camp have been delivered the message. Evolving the government’s forecasting process is progress for America, but that doesn’t mean this bearish TREND in the US stock market ends as a result. After all, the output of Bernanke and Co. lowering their numbers will be marked-to-market, in the end.

 

My immediate term support and resistance lines for the SP500 are now 1101 and 1122, respectively. Saddle up. Into the brink of Battling Bulls we go. As “Old Blood and Guts” (Patton) said, it’s time to “lead, follow, or get out of the way.”

 

Best of luck out there today,

KM

 

Keith R. McCullough
Chief Executive Officer

 

Battling Bulls - sp


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