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Thursday, January 7, 2016

Daily update 1/7 Margin debt

After the second trading halt in China they decided their trading curbs are not having the desired affect and are now suspended.  What happens now?  The rest of the world was just plain risk off today.

SPX made it down into the .618-.786 retrace zone.  If it is going to make a higher low this would be the area most likely for it to happen.  Breadth was -85%.  New highs dropped again to 25 while new lows spiked up to 490.  Despite all the heavy selling the TRIN ended at only 1.24.  The big down day on 8/21 last year saw a TRIN over 3.  While we are oversold enough short term to bounce, this does not look like a panic low.  Massive selling, but not panic. 

We got confirmation of the break of support in the night.  I have changed the formerly green support line to red as it is likely to be resistance now should we trade up there.  The futures are pretty extended from the 20 SMA now.  Last year they had a tendency to snap back when they did this, but this isn't last year.  Things might be different now.

The R2000 broke below the Aug. and Oct. lows.  It has now joined the transports in doing that. 

The NYSE composite is in the process of testing its lows.  This is a broad based index in poor shape.  It has been lagging for so long its 200 SMA (green) has crossed below the 500 SMA (orange).  The market continues to get more broken day by day.

We are oversold enough short term to bounce, but we can always get more oversold.  Right now we seem to be subject to what happens in China much like the Aug. mini crash.  What happens there tonight is unknowable.  Since this does not look like a proper low any bounce from here is likely to be short lived. 

Here is a nice long term look at margin debt as a percent of GDP.

When people say they don't see a big decline I just don't get it.  High margin debt is a proven high risk factor.  It always unwinds at some point and when it does it is always big.  Always.  The worst part is that it is very unpredictable.  It can unwind some and then start increasing again.  On the other hand it can unwind like it is doing in China.  Very violently.  Are we starting a major unwind or just a minor one?  We certainly have the weak technical condition that could lead to the big one.


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The information in this blog is provided for educational purposes only and is not to be construed as investment advice.