Clues at the Scene of the Crime

• Posted by Derek
• on November 4th, 2011

Funny week for stocks.  While volatility can be a trader’s best weapon, I see no way to spin a progression of -300/-300/+200/+200/? $DJIA days as reflective of a bullish market.  I mentioned on Tuesday that I no longer expect to test the spring highs around 1350 on the $SPX, but that doesn’t mean we head back to the lows either.  Some developments of note:

1) Unlike $SPY & $DIA, the Russell 2000 as reflected by $IWM failed to trade through last week’s low

2) Emerging markets proxies $VWO & $EEM rallied over 6% vs. a 4% bounce for $SPY from low to high.  This is a return to more normal risk appetite from a period where emerging markets bounced only after domestic stocks led the way

3) We’ll exit the week with over 80% of stocks above their 50 Day Averages, only a slight drop from the 84% reading last Friday

Those in no way change my mind that a broad explosion is now unlikely, but they reveal an underlying demand for selective risk-taking.  I think we now have a great marker in place, using the highs of October 27/28 as a line in the sand for future, isolated breakouts.  Examples from this week like $MA, $AMT, $SBUX, and $QCOM seem more likely of attracting real money than the trendy stocks like $HANS, $LULU, & $CMG that are more subject to violent disruption.

After a nice bounce from its simple 20 day and exponential 50 day, those lines seem just as likely to act as magnets than as repellents.  The simple 50 day is turning up, and should provide a nice backstop to go with the post-magnet lows just above 1190.  I just don’t like that we knifed so easily through what I thought would be support near 1260; we returned there Thursday from below but failed to battle through despite a relatively upbeat jobs report.

I could get more constructive on another successful test of the 20 day average.  The first test had no choice but to bounce after plunging 6% in 2 days straight from the highs.  Another test of that average coincident with the 1230 area that had been a battleground in mid-October would convince me that downside remains limited.  While I don’t expect to immediately overtake 1260, in this Euro-driven market anything is possible and a break above would leave this week as an island of noise below.  Whatever the case, I’m happy to be stalking selective buy setups after a few months of staring at $SPY.  Enough price memory lurks underneath to allow good ideas to work over the coming months.

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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