Last night I talked about the area of critical support on the S&P 500 being the 20-day exponential moving average or 1187. 1185 also being strong horizontal support. We got down to 1190 today on the lows after some very bad earnings reports last night. We basically got to those 20-day exponential moving averages and blasted up once again. This is the sign of a very healthy market overall. Yes, we could use some deeper selling but, yes, this is a very powerful bull market that continues to be under rated in my eyes. This is why we’ve only had long exposure since being lucky enough to call the bottom. No shorts. We gapped down on those numbers from last night and continued to run lower.
It looked like the bears had their day. Looked like I said. Didn’t turn out that way. President Obama spoke, and from that point on the market climbed higher step-by-step until it went green late in the day, led by beta or the Nasdaq, which is healthy. We closed near the highs on a solid reversal off the gap down. You can’t argue with what is. You can fantasize about what you’d like, but in this game, fantasy is NOT a good thing. As I like to say, it is what it is, and who could argue with the candles printed today. The market will get another tough test tomorrow. More on that in a bit but today’s action tells the bullish tale. Tough to keep trying to short what hasn’t worked.
Tonight we have a repeat from last night. We have two important stocks, one in particular, that are getting crushed on their earnings report. Amazon.com (AMZN) and Microsoft Corporation (MSFT). MSFT, the more important of the two. It’s down about 3.5% on deferred earnings. AMZN down on the classic “full” report. The stock has run up non-stop and has a massively high p/e that screams danger Will Robinson. AMZN is down $11 after hours.
If you played Russian roulette on this one long, I feel for you, but that’s the game of greed. It teaches some nasty lessons, doesn’t it! If you expect to get rich playing this game, quit. Close your account and leave before you’re broke. So now we have some nasty futures once again and we have to see how they do or don’t recover overnight. Another litmus test is upon the bulls to hold things up and keep it going. What’s interesting is that the ones that are getting hit on earnings really do have some good reports going. It’s just that the stocks are mature. They’re full. They’ll bounce back in time but for now, if you’re not perfect, you’re toast short-term.
You MUST be very nimble in this market. There are plays that set up over and over and we are playing them as they come around. However, you shouldn’t stay in too long if you get a nice profit. This market remains vulnerable due to negative divergences, overbought and poor sentiment numbers. At any time we could breach those 20-day exponential moving averages to make things feel ugly. Yes, today was a bullish day and this may not happen any time soon, but you have to be on guard for some bad days ahead. A market that continues to show promise and great overall action but a market also full of red flags for the short-term that has to be respected, not ignored.
The way to play this market is to buy stocks that have pulled back to critical areas of support with gaps not far below. The critical support initially being either the 20-day or the 50-day exponential moving average and if possible, a gap not too far below those levels. You DO NOT want to chase strength. You do not want to buy stocks that are elevated. You do not want to buy stocks as a rule when stochastic’s on either the daily or 60-minute charts are at 80 or higher. When RSI’s are at 70 or higher. When MACD’s are well over the 0-line. Use weakness as your tool to purchase trades. They don’t always work, but we can’t argue with the results over the past several months using this strategy. Go slow and easy here. Nothing overly aggressive but keep some scratch in the game.
Peace,
Jack
The Standard & Poor’s Depositary Receipts (SPY) Chart can be seen below.
