Elevator to Nowhere

“All commend patience, but few can endure to suffer.” -Thomas Fuller

MARKET WRAP UP 05/20/10

In Japanese Candlestick terminology, today was a picture perfect example of a bearish Marubozu, where the high price of the day on the $SPX was at the open, and the low price was at the close following a steady stream of heavy selling all day.  To state the obvious, the bears were strong and controlled the action from start to finish, as we closed down 3.90% at 1071.  What is most troubling about today’s action is that we saw no indication of any type of capitulation bottom. Rather, we saw continual and feeble attempts at dip buying throughout the day.  Each attempt at a bounce, however, was met with aggressive bouts of selling.  The selling pressure exemplified the shift in sentiment that we have seen over the past several weeks.

During the uptrend since March of 2009, we would go weeks without getting much of a pullback at all, as traders wanted to get long so badly that they were willing to chase performance to the upside.  It is fascinating to contrast that mentality to the one that we are seeing now, where traders view each bounce–however small it may be–as an excellent opportunity to sell longs and reinitiate short positions.

In fact, at one point late in the trading session today, I thought we were setting up for a tradable rally.  I became eager to deploy my 100% cash position to the long side, while (at around 3 p.m.) looking at this 1 Minute Chart of the $SPX:

Needless to say, the final hour obliteration of the inverted head and shoulders bullish setup drives home the point that patience and holding high levels of cash remain the best strategies for swing traders in this environment. Just as the failed head and shoulder bearish top in July of 2009 led to a hugely bullish move, the failure of this bullish setup could lead to further weakness, on a short term time frame (keep in mind this is merely a 1 minute chart).

Moreover, the daily, updated, and annotated chart of the $SPX shows how decisively we took out the crucial 200 day moving average today (see below).

With that said, allow me to couch the bearish nature of this post by clarifying two ideas.  First of all, the fact that we closed for one day below the 200 day moving average does not–in and of itself–mean that you should declare a bear market and short everything in sight. Throughout the 2003-2007 cyclical bull market, there were several times when we closed below the 200 day moving average, and they turned out to be great intermediate term buying opportunities in hindsight.

The second point to understand is that we are testing the 50 weekly moving average for the second time this month. On May 6th, a day of apparent chaos with robots sending billion dollar firms to $0.01 per share, the market found support precisely at 1065. That price happened to coincide with the 50 weekly moving average.  That reference point is still sloping up, and we are currently at that level again (1072), so it will be interesting to see if we have a similar type of reaction in terms of the market finding a bid there.

The weekly chart of the $SPX, seen below, should illustrate the significance of both the 200 weekly moving average in terms of resistance, and the 50 weekly moving average in terms of support.

I know that I have focused this post entirely on the S&P 500.  The reason why I have done so is because we are seeing indiscriminate, macro type of selling here.  The market could care less that $GMCR has an amazing group of products with fabulous long term growth ahead it, as with $CREE, $WPRT, $VLTR and $VECO. The charts of all of those stocks are broken.  When the broad market begins to stabilize, then we can go back to the fun part of swing trading by rewarding those fast growing firms with our capital, and having them reward us with huge gains.

For now, however, in order for us to bank coin at a later date, we need to preserve the coin that we currently have.

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