Stuck in the Middle With You

  • Posted by
  • on May 7th, 2010

Clowns to the left of me, jokers to the right

Wow, what an event…why did it happen?  Frankly, I don’t care all that much…a weakening market got suckerpunched by some technical trigger and had to go probing for buyers.  Since no one was prepared for the event, it took a huge price drop to accomplish the mission, but the lack of volume showed that the market eventually rejected this probe lower.  This post from Steven Place is the best summary I’ve read if you want a more detailed opinion.

I care about what happens next.  Panic low? End of the bull?  I say both.  But you knew I’d say that, as I rarely impose a bullish or bearish opinion into any discussion of markets.  They are a complex beast, and to lean too heavily one way or another puts you at risk of emotional attack, as we saw yesterday.

I do, however, have very strong opinions about what can happen next.  Take a look at the following $SPX graphic:

Besides being confused my lame efforts in Excel, what do you see?  I see a market that is sitting near its midpoint on virtually any timeframe.  Only the 1 year timeframe shows any dominance towards one side, as it has trended nicely in searching for higher prices.  In applying Volume-Weighted Average Price(VWAP) to SPY, you’d get similar results…by both measures, May 6 revealed the equilibrium levels for the S&P 500.  Missions accomplished.

It’s my belief that midpoints/VWAP act as either a magnet or a repellent.  When trending, prices reaching this region don’t sit for long before resuming the primary trend up or down.  When ranging, however, those levels become a source of frustration as every move gets magnetized back to the middle.  I think the Crash of May 6 brings all of these timeframes into alignment…now begins the period of building for the next trend.

I rule out nothing here, as a probe of the April highs is just as likely as a probe of yesterday’s lows.  I don’t think the 2007 high and 2009 low are in play anytime soon, as there is not sufficient “cause” to deliver that kind of effect.  I don’t mean fundamental cause, but price structure cause…a lengthier period of accumulation or distribution is necessary to deliver those types of moves from here.  But my read is that supply and demand are now in balance, correlation across markets had a peak event, and we can now have a steady dispersion amongst all stocks and asset classes.

So what?  So let’s dance! Sorry, I need to balance VWAP-speak with something from the lighter side.  As for the coming days, best to stick to the (driving) range while the clowns and jokers react to the “news”.  If I had the options chops of Adam Warner or Steven Place or Darren Miller, I’d be thrilled with the opportunity to sell premium here, but my time is best spent watching for signs that the next leaders or laggards are separating themselves from the pack.

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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