Calling the End of the Correction

June 9, 2013 (2:00 pm)

On Thursday morning, we set Twitter ablaze with numerous charts showing strong buy indications and several other explanations of why a market bottom was imminent. For those who follow us on Twitter, we hope our analysis allowed you to make some profitable trades. For those who don’t, we apologize for not remarking on our site more quickly. You can follow us @three28capital.

Click on any chart below to make it full screen.

On Wednesday night, the SPY closed at $161.27, very near the 50 day moving average, and the NYMO (NYSE McClellan Oscillator) closed at an extreme level. That was our first indication that a bottom was near.

On Thursday in the early afternoon, the SPY was straddling the 50 DMA at the $160.50 level. We viewed this as a very strong buying opportunity and purchased several June monthly call spreads that were slightly out-of-the-money.

The VIX (volatility indicator) then reared its head. It hit an RSI level that has preceeded dramatic and near-term rallies. This gave us additional confidence to continue with (and expand) our purchases.

After the close on Thursday, we made available a chart we had been watching closely. The blue trend line had formed over the past seven months during each near-term pullback. They happened to form just as price reached the lower bollinger band. The bounce off this level further supported our analysis that a near-term bottom was in.

We also took another look at the NYMO after the close on Thursday. It had moved up to -40 (from -107). Historically, after becoming as overextended to the downside as it had, the NYMO typically moves up to the +25 to +50 levels within 1-2 weeks. We still expect significant upside in the markets, which may likely re-test the recent highs.

During the trading session on Friday, we closed a majority of our SPY call spread positions after an overnight 30% gain. That was the easy money, and we kept coming back to our favorite investing phrase: “I made all my money by selling too early.” The indices are becoming slightly overbought (not a reason to short, just a reason to pare long positions). We will likely add new long positions on any pullbacks over the coming week.