I am Definitely THAT Guy

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With my internet out, I am at my local coffee shop. In between being THAT guy at the cafe, wearing a beret and discussing Engels and Marx with my table mate, it occurred to me that many charts have been able to work off overbought conditions during the past two weeks. They have done so without a sharp broad market selloff.

We are seeing underperforming sectors now starting to outperform today, namely the financials, energy and steel names, indicating a sector rotation. Money rotating out of extended leaders, such as in tech, and moving over to the laggards is a sign of a market that does not want to roll over, in my estimation. To me, a big part of trading is about assessing probable outcomes. When trying to ascertain whether this market is topping out, I am going to look at underlying strength and sentiment. With many traders displaying an incredulous at the strength we saw in September, perhaps the first few weeks of October will prove that last month was no anomaly?

There are even some charts that looked to have seen a classic breakdown, but have recovered nicely. As an example, take a look at $AAPL. You will recall that on Tuesday of this week, Apple had a mini flash crash in the morning. Ever since then, though, note how well the stock has recovered, even during down days.

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TOTAL PORTFOLIO:

EQUITIES: 64%

• LONG: 56% ($ATPG $CRZO $CSTR $GNK $GS $HMIN $TIE)
• SHORT: 8% ($QID)

CASH: 36%

My Internet is out, so I am posting this from my iPhone.

I sold out out my $MS position and instead loaded up on a full
$GS holding. I also sold out of $PAY for a slight profit after yesterday’s big ramp followed by today’s sharp reversal down.

All trades are timestamped in The PPT.

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MARKET WRAP UP 09/30/10

On the last day of the third quarter, the market threatened a major breakout within the first twenty minutes after the opening bell rang. As quickly as the S&P 500 touched 1157, it rejected that level and reversed down to 1136. At that point, the dip-buyers made another appearance to close the session down 0.31% to 1141. After a day like today, the temptation is to make a comparison to the nasty reversal we saw back on June 21st of this year, where the S&P briefly touched 1131 and then proceeded to reverse course and head down to 1010 over the next two weeks.

The simple answer is that we saw immediate confirmation to the downside following the reversal back in June, after printing that massive red engulfing candle. Beyond that, though, in the current market I believe that many individual stocks and sectors are much more technically sound than they were in the middle of the summer. Bases have had months to form and many stocks have tightened up their patterns. Moreover, many of the leading stocks have not only broken out on strong volume, but have held those breakouts after the fact.

Despite the healthier nature of the current market, compared to that which we traded this summer, there is a bunch of economic data yet to be released tonight and tomorrow. Even if you know the actual data ahead of time, there is simply no way to know how the market will react to it. So, as I wrote last evening, we are dealing with several known unkowns as well. After consolidating just below the significant 1150 level for nearly ten trading days, one group of traders will surely fall into a trap. The reversal this morning has many calling for a bull trap.

However, with the false breakouts this summer still fresh in the minds of traders, combined with no real follow-through to the downside yet, the bears would be remiss to not consider that they may be trapping themselves.

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…that’s what I thought.

I made two trades:

• I bought a 1/2 starter in $GS.
• I bought a 1/2 starter in $MS.

Both charts formed hammers or hammer-like candles yesterday, and inverted hammers today. That combination of candles, after a downtrend, is usually a sign of a tradable bottom at least.

May the best bankster win.

All trades timestamped inside The PPT.

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TOTAL PORTFOLIO:

EQUITIES: 70%

• LONG: 62% ($ATPG $CRZO $CSTR $GNK $GS $HMIN $MS $PAY $TIE)
• SHORT: 8% ($QID)

CASH: 30%

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I’m ova here now, eating sandwiches in the face of this drama. Some high quality olive oil does wonders for a sandwich, in case you were wondering. Also, a bold espresso washes it down perfectly after you have finished eating.

As tempted as it may be to sell all longs and go short after this morning’s reversal, the market simply does not want to roll over right here, right now. Take an objective look at the price action, and you will see that it is benign. The marquee materials and techs should be down 3%+ across the board, but they are not. Looking at my portfolio, not one position is down 2%. In fact, $PAY is screaming higher. Of course, I still have my long $QID hedge.

Nonetheless, the bears need an afternoon thrust lower to command my respect. I am well aware of the indecision that we have seen over the past several days, fully on display with the string of long dojis that have been printed. It is important to note that the indecision, in and of itself, is still not enough to turn me into a bear at this point in time.

I understand that many of you steadfast bears will just counter this post by arguing that the market will simply roll over tomorrow, and today is merely foreshadowing the move. Perhaps that will be the case. However, after the sustained move higher in the month of September, the bulls have earned the benefit of the doubt, which means the bears must overcome a fairly heavy burden to reverse the trend.

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MARKET WRAP UP 09/29/10

In another day of consolidation just below the significant 1150 level, the S&P 500 finished down 0.26% to 1144. While breadth was far from inspiring, even the most ardent bear could not deny the underlying strength seen in many individual issues, as well as broadly in the energy sector. The argument could be made that the weakness in the broad indices masked the true strength seen today, as we saw many breakouts and pockets of momentum continue to flourish.

At the same time, we are coming up on the end of the third quarter, and have a slew of economic data that will be released to close out this week. As usual, the actual data itself is not as important as the reaction to it by the market. Regardless, the amount of variables at play creates an abundance of known unknowns. The bulls have dominated the month of September, and they have earned the benefit of the doubt at this point, as the S&P 500 continues to operate above all major moving averages. Thus, my portfolio remains net long.

The bears may very well be on the cusp of a major reversal, as the market has been unable to stay above 1150 long enough to drink a cup of coffee. However, the assortment of potentially bearish hanging man candles printed yesterday saw no real confirmation to the downside today, given the benign pullback. Therefore, we are simply going to need to see more evidence of a change in trend before a bearish bias can be assumed.

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