Write it down on your computer. Never forget it as long as you’re playing the stock market. Two simple numbers that tell you when the waters are safe to either go long or short, or when it’s not safe to go long or short. This means you obey these laws at all times no matter what the news. The market could be in free-fall with terrible news coming from just about everywhere. The news could be great and the market soaring. You can stay oversold, and you can stay overbought, if the news is just perfect, but the bottom line is all about risk and reward. When the RSI’s on a stock, or an index on the daily charts, are flashing 30 or a bit lower, you don’t short, even if the play would have worked out, because it’s simply a poor risk reward situation. Conversely, when a stock, or an index chart, is reading 70 RSI’s, or slightly above, you don’t go long. Yes, it can work out in your favor, but the risk-reward, again, is not very good. You want as high a risk reward as possible, no matter what’s taking place in the stock market.
Tune out the noise and look at those daily charts, and when you see either a 30 or a 70 reading on the RSI, you now know what’s safest. Like I said, there are always exceptions, but not too often. Look at today for example. All the RSI’s on the daily-index charts reached below 30 yesterday intra-day. The Dow still closing at 28, even with a little better price action. No one was bullish on today. I warned no shorts because of those nasty low readings on the RSI’s. Even though there wasn’t any news to bring the markets higher, it was higher they went, and in a fairly big way as well. It’s purely technical in order to unwind those massively oversold oscillators across the board on all the daily charts. It’s not bullish. It’s technical, but technicals do count. So today we got a strong technical bounce that took the bears by surprise, for the most part. Isn’t that the way of the stock market in general? Always catch the masses taking the wrong side when they least expect it. That’s another lesson courtesy of the stock market consciousness.
Interesting today was also how the sentiment numbers came in. A real shocker as last week’s negative stock market action took its toll on the collective mind of the average trader out there. The bull-bear spread down to a low reading of only 7.4%, the lowest reading in a very long time. It’s all courtesy of continued negative action in the market and negative news around the world, especially in Europe.
The situation in Europe, feeling so hopeless, and thus, folks are giving up the bullish side of the trade, which is longer-term healthy for the markets, with regards to a good long-side swing trade. Just one week prior to this week’s reading of 7.4%, more bulls to bears, we saw a reading of 17.4%. A drop of over 10% in one week is phenomenal for the bulls. It shows just how fast pessimism can creep into the picture. If the market stays mostly down for the foreseeable future, it won’t take too much longer to get the number inverted, so that there are more bears than bulls. Once there are more bears than bulls, you start thinking about loading up long when the right technical stick is printed, no matter what the news out there may be. It took a -10.8% reading last October before the market exploded higher. There’s no way to know exactly what the number will be when the market rocks this time, but you start looking for the right technicals to align once you start getting inverted in any way at all. It’s interesting to watch the pessimism ramping here.
All eyes, and especially ears, will be Mr. Bernanke tomorrow as he speaks to the world about the state of the economy, both here and abroad. He’ll talk about the risks involved in the United States based upon the continuing problems abroad. Folks will be listening to what words he may have for the probability of a QE3 program coming to a market near you sooner than later. The market is thirsting, unfortunately, for more free cash. The market acting like a three-year-old who wants more candy, even though he knows it’ll make him or her sick. It tastes good, so give me more, please, and if you don’t, I’ll cry. The market wants more future debt to cure the short-term, and wants it now, so it’ll be more than interesting to see how it reacts to what he does or does not say about future free cash. The Fed has warned that he is worried about hyper-inflation and what that’ll do to the many that are hurting in this country.
It appears he’s actually not anxious to do this QE3 program, but will do so if need be, for sure. Tomorrow will be fascinating from that perspective. Whether he’ll do what the stock market wants him to do, or whether he’ll stick to his guns and wait as long as possible before finally caving in and only doing so in the very most desperate of situations. Hopefully, that will never come up, and therefore, never actually implementing this terrible mistake in the making. Listen closely to his testimony tomorrow, folks. It will be very interesting.
1313, or the 20-day exponential moving average is the next area of strong resistance on the S&P 500. 1250 remains long-term, powerful, and critical support. That’s the long-term up-trend line off the March 2009 stock market lows. It would be a disaster to see that level get taken out. It would open the door to a strong, long squeeze lower in the market. Bulls would simply have to give it up below this level. If we can clear 1313 powerfully, it would be unexpected, but very interesting, to say the least. It would make things a lot more confusing to everyone, but we all know we can see breaches. Volume would have to back up a clearance of 1313 on the S&P 500.
For now, you should keep things extremely light. No more than 15% exposure on either side of the ledger. News continues to move the markets almost on a daily basis. Keep in mind, the trend is still lower overall. Be safe, and be smart here. Preservation of your hard earned dollars is essential now.
Peace,
Jack
