Tuesday, February 9, 2010

Last Week’s Sell-off Had All the Signs of a Capitulation

•US Trading: As highlighted in our Technical Alert on Friday (February 5th), last week’s sell-off had all the signs of a classic capitulation. We saw a big jump in risk aversion with a spike in the VIX index, the highest volume in SPYDERS since the March lows, a strongly increasing put/call ratio, and a spike in the NYSE TRIN/ARMS index. Have we seen the lows? We don’t think so, from a cyclical perspective it is too early to call a bottom, and from a price perspective most charts still have some room to test their next relevant support levels.

•Conclusion: According to our cyclical roadmap, we still favor a 4-month cycle low in late February; so over the next 3 weeks we see equities as still vulnerable for more down tests. However, with last week’s capitulation we think we have seen 90% of the downside, so the next 2 to 3 weeks could be more of a bottoming process
(including a bounce this week), instead of expecting more of the same aggressive bear attacks from last week. From a price perspective we stick to our recent call and see most markets pulling back to their 200-day moving averages. Our SPX target is unchanged at 1040 to 1020, the Nasdaq Composite should see a low at around 2050. Given last week’s capitulation we are changing our tactical bias and recommend aggressive traders to start buying/ accumulating into further weakness to position for a significant rally into March/April.

•European Trading: Last week’s bounce was shorter than anticipated and another sharp decline materialized into the weekly close. The Euro-Stoxx has broken its 200-day moving average and the same signals we are getting from key sectors such as banks, financial service and insurance, whereas personal has a hit a new relative all time high and continues to outperform aggressively. Given last week’s capitulation a bounce this week is likely. Since we are still far away from forming any significant price bottoms it is however too early to call a bottom.

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