China Has Its Bear Suit On

I’m starting out tonight by taking a look at the moving averages. I have provided an updated table below.

There was more technical damage done last week. The 100 DMAs were broken on SPX, QQQQ and IWM. PGJ (China ADRs) broke below its 200 DMA by just a touch joining FXI (state owned China) which was already trading below its 200 DMA.

Other notable breakdowns were GLD breaking below its 100 DMA and $USDUPX breaking above its 200 DMA. Speaking of currency, FXE (EURUSD) is now trading below its 200 and 300 DMAs and is in total bear mode. At the end of 2009, I said that I expected a range bound USD but I have to admit the total breakdown on FXE and breakout on the $USD index over its 200 DMA is pretty bullish for $USD.

So what does it all mean? I have posted multiple times that I do not want to be long in this market with China broken. FXI has cleanly broken its 200 DMA and PGJ is trading just beneath it. I objectively label China to be in bear mode based on FXI and PGJ trading below their 200 DMA. I remain particularly pessimistic about the China charts because of the complex head and shoulders top on FXI.

With the major indexes breaking down below their 100 DMAs, it is looking more likely that we’ll see a correction to the 200 DMAs. I am personally comfortable waiting out the correction on the sidelines if this scenario plays out rather than trying to short the market down to the 200 DMA.

I label an index to be in bear mode if it is trading below its 200 DMA. If the bear market does reappear, there will be a ton of time to trade it after the indexes breakdown below their 200 DMAs (after I have deemed these indexes to be in “bear mode”). That is when the real bear party would start. Not just yet. Meanwhile, if this is just a correction, it is unlikely that I’ll be able to play the move down and reverse course well enough to make shorting the market now worth my while. I’m not saying it can’t be done, but for me it is simply not worth the risk and frustration. I’m willing to sit the market out for months if I need to do so. Put another way, I’ll wait for the market to regain a solid up trend or I will wait for a solid downtrend to commence.

The $VIX is sporting a bull flag. Another warning indicator for those with long positions.

If you believe this is just a correction, there are a few bullish stocks still left in the IBD 100 (which is where I often hunt down momentum stocks).

Medical Devices: ISRG, KCI, VAR. The IHI medical device ETF is also an option.

Health Care Plans: HUM, CI

I definitely prefer the medial devices over the healthcare plans. I’m not enthused about trading health care plans due to the headline risk. They may shoot up like a rocket, but it is hard to sleep at night owning these stocks with Obama lurking in the background. We’ll know more about HUM and CI this week. HUM reports tomorrow and CI on Thursday.

Full earnings and economic calendars are available from briefing.com (see right hand navigation pane).

That’s all for now.