The Start of a Melt-Up or Irrational Exuberance?


 January 3, 2013 (9:15 am)

Yesterday we saw a continuation of the huge rally sparked on Monday morning, when expectations turned positive about a successful conclusion of the fiscal cliff talks. It reminds me of the price action following the QE3 announcement in mid-September, when we went from $138.50 to $146.00 in a straight line. The SPY became overbought and retraced half its gains over the next two weeks. After rallying from $139.50 to $136.00 at yesterday’s close, we’re now entering overbought conditions again. We went short in the SPY Portfolio at $145.35 yesterday morning and expect to hold those until the SPY closes the big gap down to $142.50.

That said, one thing we’ll be cognizant of is the potential for a melt-up rally. With the Fed pumping tens of billions into the illiquid debt markets each month, the liquidity is flowing. We’re constantly looking to disprove our thesis. As conditions change, and as our charts dictate, we’ll remain nimble.

In the chart below, you can compare the action from the past two days to the action after the mid-September Fed announcement. Also, it’s important to notice that we’re entering overbought conditions before we’ve touched the upper trend line of the (blue) rising channel.

20130102-235230.jpg

The SPY Rising Channel

The chart below provides a closer look at the rising channel. Also notice that the RSI made a slightly lower high in the very near-term even though the price is higher. That creates negative divergence, with the buying momentum slowing compared to the price. A bearish sign. We’re comfortable holding our SPY short positions here, and expect a near-term pull back.

20130102-235240.jpg

Apple Resistance at $555

The Apple chart below illustrates the downward sloping trend line that the shares finally broke through on Monday morning, powering a substantial rally. $555 has been a line of support/resistance for much of the rally and the shares reached overbought conditions on the near-term as it reached that price level. Consolidation or a slight pull back would be healthy here to allow the shares to back out of overbought levels before powering through that price point.

20130102-235249.jpg

Double Bottoms Galore

The potential double top reversal pattern we discussed on Monday is now clearly off the table. The two (larger and smaller) double bottom reversals remain firmly in play.

20130102-235259.jpg

Apple Weekly Indicators

The chart below includes two significant aspects. The first is that in each instance that the RSI and Chi-Osc both became oversold (orange lines), the shares saw a powerful rally as the indicators reversed out of oversold conditions. Second, we’ve retaken the long-term trend line. It was important that the shares didn’t remain under that support level for very long, and the fact that it began 2013 by powering above that level is clearly bullish for the shares.

20130102-235307.jpg

Apple Long-Term Rising Channel

The long-term channel remains intact. The bounce to the downside may have been an overreaction to the previous upside breakout in the channel.

20130102-235319.jpg

Apple Lines of Significant Support/Resistance

Throughout the recent correction, several lines of support/resistance were tested and re-tested. As many of them proved to be (temporary) support on the way down, they’ll likely prove to be (temporary) resistance on the way up.

20130102-235328.jpg

Where Volatility Stands

In the near-term, volatility is oversold. A spike in the VIX tends to coincide with weak near-term conditions in the broader markets.

20130102-235345.jpg

…and a longer term look at the VIX.

20130102-235353.jpg