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MARKET WRAP UP 11/29/10
This morning saw a very strong move lower in the broad market down to that 1173 level on the S&P 500, which marked the recent low on November 16. Beyond that, we saw one of the basic and ubiquitous tests in all of technical analysis, as standardized as the SAT, a test of the 50 day simple moving average. Keep in mind that moving averages are best used as reference points, rather than places where you should automatically turn bullish or bearish. What you are looking to gauge is how quickly and forcefully the market reacts, if at all, to a given moving average. In the case of the 50 day moving average on the S&P, you are talking about such a widely used reference point that many market players who despise technical analysis still keep tabs on it.
Today, the test of the 50 day moving average was a success for the bulls. We broke below it briefly, scaring out many traders who used it as a place to automatically sell (a mistake, as mentioned above). At the same time, the bulls swiftly came in to buy within the first ninety minutes of trading. For the duration of the session, stocks drifted higher, as we closed down just 0.14% to 1187. The fact that we quickly breached and then bounced off of the 50 day without ever looking back the rest of the day is a real plus for the bulls. In many respects, today can be seen as the quintessential “shakeout.”
Nonetheless, if the bulls show no follow-through in the coming days, then the choppy range is likely to continue. Indeed, it can be argued that the bulls must capitalize on today’s intraday reversal, else lose the initiative and slowly give the baton to the bears.
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