Bottom Callers Anonymous (Market Wrap Up 05/17)

After moving sharply lower into the New York lunch hour today, the bulls managed to stabilize the market and close near the highs at 1136, up 0.11% on the $SPX.  Days like today are interesting from a sentiment standpoint, as many traders are eager to call a bottom.  In fact, the daily updated and annotated chart of the S&P shown below, shows a possible bullish hammer today (long green wick with small body on top).

Note that on February 5th of this year, that hammer did, indeed, mark the bottom of the correction.  However, bullish hammers (as per Japanese Candlestick charting, signifying a day where the bears control the action, before the bulls make a very strong comeback late in the day to recapture the initiative) need confirmation to the upside before you should act on them. As far as resistance and support levels tomorrow are concerned, look for 1142 and 1150 to be resistance, and 1124 and 1115 as support.

As much as I would love to declare today the bottom to our most recent market correction, I remain skeptical for several reasons. For starters, many charts remain broken.  Moreover, the daily price swings and volatility are not healthy, and are not consistent of a market that is on the cusp of a sustained move higher.  Finally, I am not seeing institutions providing an underlying bid to this shaky market, via heavy buying volume.

As noted in an earlier post today, when the S&P dipped below 1120 I decided to take profits in all of my short positions (via inverse ETFs) and move to 100% cash. If you describe yourself as a swing trader, trading in tandem with the primary trend of the market, then I believe you have to step aside here until the market decides where we go next.  For all intents and purposes, we are in no man’s land.

On the one hand, leading stocks like $NFLX and $CREE were up sharply today, but on the other hand, their day to day price swings have been massive.  Violent price swings are particularly concerning after the kind of parabolic moves up that both stocks have enjoyed the past eighteen months, as they signal indecision and a possible reversal.

In addition to those two names, several other leading stocks (over the previous eighteen months) are showing troubling charts: $GMCR, $WPRT and $WYNN.

From my vantage point, these stocks are damaged and need time to repair.  That process is likely to take weeks, not days. I will continue to be skeptical of any bounces that I see, until the charts of the leading stocks offer good setups–and I do not even see decent ones at this point.

Calling any type of bottom (or top) in the market can be a fatal blow to your portfolio, as you are essentially shunning the opinions of millions of the smartest, wealthiest people in the world engaged in rigorous price discovery.  They are often armed with vast resources and information.  To be sure, there are times when it is correct to be a contrarian.  However, for every Warren Buffett who successfully becomes greedy when others are fearful, there are thousands of retail investors who become broke when others get rich off of their hubris to declare an inflection point, before it comes to fruition.

UPDATE: I have changed my daily S&P chart. Originally, I had said the imminent 20/50 day moving average crossover would be bearish.  However, Mr. Woodshedder was kind enough to point out that the data he has suggests that it is actually more bullish than bearish, so long as we continue to close about the 200 day moving average.  You can see it all, just click here.

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