Bulls Now Have a Stop

• Posted by Derek
• on October 19th, 2011

On August 3, we had a great reversal at $SPY 123.53 that led to a strong close…I laugh at myself for thinking that could be a low.  On that close at 126.19, 22% of stocks closed above their 50 day average.  On August 31 we were rejected at 123.5 with 24% of stocks above that average.  Tuesday?  We raced up to 123.50 before pulling back, with 68% of stocks above their 50 day average.  While it guarantees nothing, there’s no doubt this trip to that level has better energy.  I’ve made some notes on my $SPY daily as follows:

What’s most important about Tuesday is that longer-term buyers finally have a close & identifiable stop.  The vacuum off the lows was impressive but needed a different angle of ascent to sustain itself…Tuesday morning’s low gives us that.  Using that low of 119.20 and the July highs of 135.70, we now have a 4:1 reward:risk for playing a Q4 rally.  I’ll still take each day as it comes and position with the swing direction, but failing to take note of the shifting tide would make for incomplete analysis.

I’d expect this move to unfold much differently than what we’ve seen in the last 2 weeks; fewer 90% days, shrinking ATR, (hopefully) fewer gaps.  Who’s have thought a week ago that we’d find ourselves in a broad move higher with $IBM and $AAPL clipped on earnings?  If those are the weakest links in the chain, it’s going to be tough to knock this thing back to the depths of $SPX 1100.  Paraphrasing Heritage Capital the other night, the reaction to Monday’s drop was a lot more tennis ball than egg…important evidence.

I’m buying a simple Jan12 $SPX Call Spread, paying $6 to buy 1325 & sell 1350.  That’s not a buy it and forget it position, it’s just a simple way to begin a bull campaign that may last a week or a quarter.  This thing will be adjusted a zillion times, hopefully with a few chances to bring the short side in on rallies by selling near-term weeklies or monthlies.  There are more sophisticated ways to play it and also capture the expected drop in volatility; I’m just sharing this as a cheap way to have defined exposure if we return to the May highs.  It’s getting hard to be a bear, and active managers have a lot of buying to do if this thing becomes real.

The information in this blog post represents my own opinions and does not contain a recommendation for any particular security or investment. I or my affiliates may hold positions or other interests in securities mentioned in the Blog, please see my Disclaimer page for my full disclaimer.

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