The Fear Factor

The following isn't technically a technical indicator discussion, but looking at the pattern of the current five month bull market from Bespoke Investment Group, we get the sense that both bulls and bears fear factor of being wrong and missing out on the big move is getting stronger.

We couldn't help but notice the length of the candles getting longer and more regular. Notice especially the first test of 1100 and the ensuing test of the 50 day SMA.

The run-ups are for the most part slow and steady (until the most recent one) and the pullbacks fast and furious. But notice the pullbacks almost always have strong up days trying to fight them.

Conclusion 1: the old adage that it's easier for the market to fall than rise is clearly seen. This is because pulling money out is easier than taking the risk of committing money and having it decline. Cash never declines in value (please, don't even think of starting a tangential diatribe about the dollar. We're talking about a two variable, and only two variable, equation: dollar priced SPX vs dollars, period.)

Conclusion 2: The 50-day and 1100 support and resistance points have become "sticky", both of them. In the last three areas where the price has approached either point the market did not want to move away from that point in either direction. There is very strong sentiment in both directions.

Monday will be interesting. We're expecting some volatile sideways movement as the moving average rises to the 1100 mark. Besides the technical aspects of that, the price range of indecision during the last three tests is awfully close to the range of price between support and resistance.

The ideal scenario would be sideways motion from now to end of year with SMA(50) rising up to 1100 without a strong breakout. That would give us some very nice income on our bi-directional short put strategy and top off our year with close to 20% gain so we can go flat around the new year and catch our breath, waiting out the market's indecisiveness and getting some sense of economic effects on corporate America during January earnings season.

While we're not one of those who subscribe to belief in the end of the financial world as we know it, the 10-year chart on SPX suggests this push off the bottom has come faster, straighter, and longer than the 2003 recovery. It is also clear the sell off was equally more straight. So one would expect a fast straight reversion to some equilibrium point. Because of that, our sentiment for the next few months is sideways/down for a few months as opposed to our current sideways/up sentiment. However, during 2006 we were bearish on the premise that the market can't just go straight up for a year without any correction, and was clearly proven wrong. We'll never say never again. [roll theme song]

My name's Bond ... Jade Bond.