iBankCoin
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Joined Apr 1, 2010
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Be Cool My Babies

MARKET WRAP UP 05/26/10

In sharp contrast to yesterday, today we saw a strong gap up at the opening bell that was faded for the duration of the trading session, as the S&P 500 finished down 0.57% to close just under 1068.  Whichever reason you choose to finger as the culprit for the weak close, whether it be the weak Euro, Steve Ballmer’s negative macro comments, or an overall broken market, it is crucial as a trader to keep a level head.  Anecdotally, today I noticed many traders on television and around the internet grow extremely frustrated with the market’s inability to turn on a dime and hold its gains.

However, as I noted last night, even if we do, indeed, confirm yesterday’s bullish hammer, we will likely need a few days of consolidation to heal charts and stabilize the market.  Stabilizing a market that has endured the type of technical damage that we have seen over the past six weeks requires an awful lot of capital and patience by the bulls.  So, why not let others step in and do the hard work for us? If the bulls are unsuccessful in their attempts to heal the market, then they will surely be burned, as we could easily be consolidating before completing another leg lower.

In fact, if you look back at the bullish hammer that marked the bottom of the January/early February correction of this year, you will notice several choppy trading sessions after we printed that reversal candle.  To state it simply, the fight was on between the bulls and bears, and eventually the market resolved to the upside.  The best risk/reward strategy would have been to wait for the resolution, and only then allocate your capital to the long side.  Unlike the fast and furious “elevator down” nature of bear markets, a healthy bull market is going to give you better entry points.

It is also worth noting that just because we had a few choppy–and even down–days in early February, that did not negate the hammer that was printed on February 5th.  Similarly, today’s price action does not negate yesterday’s hammer. The updated and annotated daily chart of the S&P 500, seen below, should illustrate the similarities between early February and now.

This analysis should reveal why cash continues to be an ideal position for swing traders right now.  We are still relatively oversold, but we can most certainly form a choppy bear flag and break lower over the coming days and weeks. On the other hand, if yesterday’s bullish hammer proves true, we are still going to need to stabilize this market before moving higher. I might miss out on some quick money to the upside, but I am always looking at the potential rewards in the stock market through the prism of risk.

Hey, don’t take my word for it.  Listen to George Harrison. It’s going to take money, patience and time to do it right.

[youtube:http://www.youtube.com/watch?v=-_niy2ZM5Jo 450 300]
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44 comments

  1. Ol' Jack Burton
    Ol' Jack Burton

    Well, I would say that is one of my favorite music vids and GH was probably the best post-Beatles Beatle, but that might incriminate me as being over 47 1/2.

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  2. sssc

    excellent timing for this post! i have been pretty much watching and waiting for the better part of 2 weeks. today i did scratch out of SNDK & started a small probe is MRK.

    thanks

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  3. Dog, D

    Very elucidative – thank you.
    Staff, on behalf of Mr. Devil D, Esq

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    • chessnwine

      I am sorry to hear about the loss of your assistant, a Mr. Samsonite Hamburgalar.

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  4. JimH

    Yep…
    “Whichever reason you choose to finger as the culprit for the weak close, whether it be the weak Euro, Steve Ballmer’s negative macro comments, or an overall broken market, it is crucial as a trader to keep a level head.”
    News, numbers, talking heads, even CEO jabberings have exactly zero predictive value, IMHO…
    What matters is how MotherMarket reacts to all of the above… Hum… Maybe the market shoulda coulda woulda gone up… in the end, price is all that really matters.
    Also agree that cash is king right now (we tend to forget that cash IS a position!)
    ChessWine… nice analysis… I likes the cut o’ yer jib, laddie

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  5. DanishGUY_Mucus

    Thanks for another savvy update.

    One comment though:

    I would not call yesterdays SP500 candle a “hammer” as I think that the long green candle on the SPY is more representative of the price action than the hammer depicted on the SPX. We gapped down and moved up from there. The price action of a hammer represents a breakdown and a reversal.

    The february low hammer was a hammer on both the SPX and SPY.

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    • chessnwine

      Fair enough, but I am more inclined to believe the SPX, as it is the true index, where was the SPY is a traded ETF of the index. Why not go right to the original? You do make a very valid point though. Thanks for reading.

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      • verbotenstylen
        verbotenstylen

        I actually made the same comment about the hammer below, didn’t see this one. In response to what you say about the SPX being more “true”…pull up a one minute chart that shows the two days of activity from Monday through Tuesday for both SPX and SPY. The SPX basically has an artificial huge red candle to open on Tuesday. That doesn’t accurately reflect trading, as the ES and SPY were both lower. I believe it has to do with the way SPX opens, ie, not all 500 stocks may have their first trade at the same time. I just know from options trading that if you have options on SPX or other indices, that they don’t settle at the close of trading on expiration Friday, they settle on the “opening print” Friday morning, and one can end up getting screwed because the opening print can vary from the true open.

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  6. lindsay

    so cool. uber cool. “yoga cool”.

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  7. hooper

    Thanks for the update,

    Joined you in 100% cash today ,sold my
    LIWA when it was near its HOD.

    I think a lot of traders barely have a foot hold in this market
    and will be shaken out soon.

    I also think the small caps need to get hammered.
    TZA might be the best vehicle for a trade.
    Picked up a little today in the low 7,s
    with a tight stop.

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    • MarshalN

      On the flipside though, $RUT’s been the strong spot. If we rally TZA’s going to kick you in the groin.

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      • hooper

        Absolutely , areas of strength on the downturn can become out performers
        on the flip.
        On the other hand in a true bear market , everyone goes down eventually.
        I have a bearish bias right now but will not hold onto it if mother
        market thinks otherwise.
        Keeping most of the powder dry,watching individual small caps.

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        • cebu sun

          Hooper
          I agree with your bearish bias. I see other 3xiETFs looking positive (signaling a down mkt): FAZ, EDZ, DRV. The worm has definitely NOT turned yet.

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    • Yogi & Boo Boo
      Yogi & Boo Boo

      Hooper – Which will be shaken out? Late bears? Late bulls? Both? I think a case could be made for either all cash and patience, OR having taken a position upon the extreme PPT reading yesterday. If you were late and purchased yesterday afternoon, you have a far smaller cushion or margin of safety. I guess it’s just one of those paradoxes of risk. It ain’t linear and it ain’t easy – too early you’re screwed, too late same deal.

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      • MarshalN

        Someone was talking about his short VXX on Fly’s blog a few days ago…. he’s right today, but probably not before he got gapped out massively yesterday.

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      • hooper

        Very true,
        Time will tell if we are putting in a
        bottom or rolling over again.
        If it was easy we would not be here bouncing ideas around.
        I appreciate the conversation

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  8. Rand

    Ah, finally; the iphone update is in!
    Good to see ya chessmwine, sir!

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  9. Lolo aka Kenai in the PPT
    Lolo aka Kenai in the PPT

    Hey Chess,

    well, I decided to dip my toes back in this morning, and promptly regretted it. On the up side, the stock a bought a few weeks ago and saw drop consistently since has decided today was the day and is up 16%. Go figure.
    I just joined the PPT today, so will be seeing you on the other side!!
    A+

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    • chessnwine

      Wise decision on the PPT. You will be happy you did so.

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  10. verbotenstylen
    verbotenstylen

    Greetings Chess!

    For what it’s worth, yesterday wasn’t really as much of a “hammer day” as that chart of SPX would let on. The charts of the indices like SPX and DJX smooth out overnight gaps because of the way they open. If you look at SPY, the market really opened much lower. It’s still a bullish candle (not sure what you’d call it), but probably not as much so. The gap was just faded…rather than the market opening even, getting pounded, then rebounding with a sudden bull force.

    My read here is on the bearish side. We gapped under SPY 110, as well as the much obsessed over 200 day MA, back on 5/20, and our big bullish moves since then have been gap fills. I’m now selling call spreads, but will go full-burlap if we cut under yesterday’s low.

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    • chessnwine

      Fair points. I am inclined to say we either go sideways or up. However, the trend remains down and you do have that in your favor. Thus my cash position.

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  11. SteelerTrader78
    SteelerTrader78

    Another great post Chess- Thnx for sharing and keep up the excellent work!

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  12. alf44

    This “Market” … has dramatically changed !

    Accept it !!!

    Where before … you bought the “dumps” …

    NOW … you SELL the “humps” …

    … and DON’T … “diddle in tha middle” !!!

    Some of you are over thinking this ! imo

    .

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    • chessnwine

      Yeah alfie–I am glad to see you back here.

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      • alf44

        …I never left ! fwiw

        .

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        • chessnwine

          So, you are wildly bearish here?

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          • alf44

            …not “wildly”

            …not mildly

            BUT … YES … “BEARISH !!!”

            .

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          • alf44

            … oh … and BTW … I actually followed your earlier reco and SHORTED me some NFLX !!!

            The Daily Chart seems poised for some downside … even in the face of some assclown calling for a $130 price target on it today !

            Go figure !!! LOL

            .

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          • chessnwine

            YES–NFLX was classic shooting star reversal, but my call on WPRT blow off top was even better.

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  13. Le Fly

    Chess has been added to ibankcoin’s iphone app. Go get your update.

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  14. Paul

    Excellent comment:

    “Stabilizing a market that has endured the type of technical damage that we have seen over the past six weeks requires an awful lot of capital and patience by the bulls. So, why not let others step in and do the hard work for us? If the bulls are unsuccessful in their attempts to heal the market, then they will surely be burned, as we could easily be consolidating before completing another leg lower”

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    • alf44

      …there is a ton of overhead resistance that will need to be dealt with for there to be any significant upside !

      The BULLS definitely have their work cut out for them. imo

      .

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      • JimH

        good comments, Paul & alf44; huge gaps against prevailing trend are often murder-holes…
        note how this AM’s hi relates to hi’s of Mon & Wed.
        i’m waiting for a break above the 200 SMA in the SPY…
        hooking up with this market right now would be like marrying a crack-whore

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