The immediate consequence was a surge in asset inflation and the Yen carry-trade coming back in force. This, combined with end-of-month window dressing, helped the S&P500 gain almost 2.5% on Friday.
I'm glad I was long, and I should even have been more long. The question, is what is in store for the coming week?
Last weekend, I wrote we would be down on Monday because Friday's rise was not supported by a strong positive MF.
http://www.effectivevolume.com/conte...anuary-25-2016
This time is different: the MF was very strong on Friday (more than 300% a normal MF) and indicates that this push could have legs. This is even more true knowing that 99% of traders want to fade this move. Why? Because we all know that oil will revert back down, that companies earnings and guidance are not good, that bad debt is still around, that China will implode...
So, to summarize the situation, we have:
1. Liquidity made available for US-based assets through another negative interest rate carry trade.
2. Markets populated with convinced shorts.
3. The S&P500 cheaper than it was just one month ago, with the great majority of stocks below their 200MA.
So yes, markets have only one way to go: higher, at least until the last bear gives up!
However, you can note on the above figure that the MF is back to neutral already and that the OB/OS indicator is at -20, also closer to the 0 level. This means that the Oversold aspect of the market has been worked out.
Hence, I performed a small stats study calculating the S&P500 gain X days after the S&P500 bounced up between 2% and 3% supported by a strong MF. These moves when occurring on a low OB/OS signal have produced much better returns than when the OB/OS was already higher than -30 (line in red.)
It is also interesting to compare XLF, which displayed the strongest MF pattern, with IBB (Biotech.)
This tells us that not everything is moving with the same strength and that biotech will probably fail back down faster than the rest of the market.
Note also how the GDX MF looks! The US$ is too strong now for gold not to be pressured back down next week.
Finally, we can see below that the S&P500 closed above its envelope. If we run the Breakout Calculator, we can see that for the coming five days, short trades offer better R/R ratios than long trades.
Conclusions:
I think this move has the potential to carry us back to the resistance level of 2000, but statistical data tells us that this will not happen in a straight line.
For now, I believe that the best strategy is to buy weakness but short strength in biotech.
