Wednesday’s final hour sell-off continued on Thursday as reluctant dip-buyers allowed the bears to gain ground. The action on Thursday started reasonably well as the bulls looked to grind higher only to see a vicious sell-off that started about mid-day and lasted into the close. No direct headline or news has been attributed to this fall. It appears it was mostly a collection of the negative EU headlines, particularly German debt issues and high bonds yields concerning dip-buyers. As the dip-buyers were afraid to join, stop-losses were triggered upon testing the lows of the day creating a wave of selling. The only positive is we are still above a few key technical support levels near 1200 in the S&P 500 (SPX), but the fact we are testing these levels is a big concern in itself.
The EU continues to weigh heavily on our markets, giving us no break and vicious swings. I would not be shocked to see a fluff positive headline run us up in the coming days on light-volume. This means we must take profits fast and keep high levels of cash. With options expiration on Friday and call option premiums completely crushed today, some options traders believe we will see a rally on Friday. Can any rally be trusted though
The markets have been forming a technical triangle, which is a type of consolidation pattern. As the pattern narrows, the next direction for the markets is determined based on the direction of the break. As of today, the break was to the downside, but with so many technical support levels, we can’t blindly expect a collapse.
Volumeless rallies have been the key to this market over the past few years, something new to any seasoned trader. Volumeless rallies are not to be trusted by the old rules, but this new market makes you look foolish for having that rule. With bonds being bought and ProShares UltraShort 20+ Year Treasury (TBT) nearing it’s yearly lows, I am growing concerned we have a weak floor in the equity markets which could see a downtrend begin that most do not expect. Due to this, I allowed my stops to trigger and sold other positions in the green to raise more cash. I went from nearly 80% invested to less than 40% invested in two days, not a good sign. On a bounce Friday, I’d be a seller raising more cash and waiting until next week.
With the Super Committee announcement next week and odds of no agreement or a delayed verdict, I find it hard to hold much inventory anymore. Seasoned traders all over who started joining the market have become so frustrated these past two days that they are now bypassing the usually positive seasonality in the market and waiting until 2012 to start over with a fresh mind. The illogical swings in this market are likely to make more traders do the same. I don’t expect much action from me until after the Super Committee announcement.
I still feel we are likely to bounce on low volume, but I can’t bet aggressively on it as long as TBT continues to fall lower. A rebound in TBT would likely see me grow more bullish, but we’ll have to wait and see.
You can follow my trades alongside the 36,000 plus market players who follow me on SeekingAlpha (Shameless promotion). As always, do your own homework to see if you agree. Good luck out there.
Mike
No positions in mentioned stock
