Game On

  • Posted by
  • on February 24th, 2011

For 2 days, I had to let things play out.  Once it became obvious on Tuesday that new highs were off the table, it was time to let the downside probing begin.  And begin it did.  I had no play coming into it…only a very few could have avoided the short side through the 2011 rally and then shorted at a high enough price that this week gave them a profitable trade.  And through Tuesday and Wednesday, I saw no way to identify a low compelling enough to offset the energy of the selloff.

But now we have a game.  Tuesday’s highs and Wednesday’s lows give us a chance to set some levels and see how stocks react.  Staying above 133.86 or below 130.21 on $SPY would be surprising but pretty clear evidence for the next index move.  More likely, we’ll stay inside those boundaries for a few days and get a chance to assess the action in the market of stocks.

I really don’t care which way things resolve…I’m light as can be and this is the first area of debate since the early November selloff that, in hindsight, was a bullish consolidation.  Given the underlying trend and fear of falling behind, I lean towards thinking this is the same…the pause that refreshes and sets up another assault on the highs.  But it doesn’t matter, the key is that we have a battle to observe after months of a relentless bid under the $SPY.

For index players, it’s a fairly good bet that neither of those levels will give way the first time so they are best viewed as a fade.  However, the better evidence for me will come from watching stocks and sectors set up as they approach the highs and lows of the range.  It may take another day to get this evidence…today is either Day 3 From the High or Day 1 Since the Low.  I think it’s still no man’s land; we’re more likely still contracting from last week’s highs rather than expanding from this week’s low.  I’d prefer to see a few more eager bears and weak bulls get trapped into “correction” thinking.

No man’s land means a move into a region where the “Other timeframe” can reassert itself.  I’ll leave you with the following from Wayne Whaley on what the other timeframe participants may be thinking as they look through the fog of the Middle East:

But what happens when these occur at after a high, not a low?  Wayne is thorough(send him an email if you don’t already get his free daily letter), he lays it out as follows:

Throw in the upcoming turn of the month strength, and the ingredients are there for a rip-snorting rally once the energy from the President’s Day selloff dissipates.  After 2 days of lopsided breadth and the chance for more, I like the odds that this afternoon will show us a structure that could lead to a violent snapback into next week.  If stocks can accept the scary spike in oil, I’ll be looking to buy for a 2-5 day hold.  Time to strap into the turret and let price and volume reveal the composite picture.

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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