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Eyes Wide Shut? Market Wrap Up 05/18

With the recent news driven nature of the market, a wedge has been drawn between various traders, commentators, economists, etc.. There are those who think that we are simply experiencing a healthy pullback that is part of the wall of worry just like we saw in 2004, during that cyclical bull market.  Those people insist that the headlines coming out of Europe and other parts of the world are blown out of proportion, and that investors should show some gumption and buy the dip.  The other school of thought is that everyone has their eyes wide shut at how bad things truly are, and how bad they will soon become. They believe that we are in for another round of a 2008-style deflationary crash…or worse. The wild price swings, increased volatility and selling volume all illustrate the unease and uncertainty with which the market has had in trying to reprice equities commensurate with the risks associated with Europe, China, etc..

Until we find out which group is correct, I believe it is best for individual traders to avoid becoming emotionally attached to either thesis.  The price action, volume, and other indicators have been doing a solid job leading us into holding a large cash position thus far, and there is no reason to expect the charts to betray us now.

The daily, updated and annotated chart of the $SPX illustrates the problem with trying to time an inflection point, as many traders did with the possible bullish hammer printed yesterday.

About the only positives that I see for the bulls are that we are oversold again, and we did not take out yesterday’s low, just south of 1115.  We are also still above the 200 day moving average.  Notice how the 1150 area (pink horizontal line) is turning into heavy resistance again, just as it did in January.

As I said earlier today, I see unfavorable risk/reward profiles to both longs and shorts at this point in time.  One possible scenario is that we narrow our current trading range over the next few days, forming a wedge or pennant that eventually resolves sharply one way or the other. Another scenario is that we will have an imminent test of the 200 day moving average–just above 1100– in the next day or two, which should offer a chance for a tradable bounce.

If we see any kind of dead cat bounce in the next few days, one area that I believe is setting up for a good short trade is the casino sector.  I mentioned $WYNN yesterday as showing a weak chart, and I believe $MGM and $LVS are comparable.

Despite the above short ideas, there is nothing wrong with taking a pass on making any trades right now.  This market is chopping up many overly aggressive and overeager traders, and you can be sure that the brokers are racking up huge commission fees with all of this volatility.

Michael Jordan often used to say that one of his keys to success was that he let the basketball game come to him. In other words, he stopped trying so hard to force good things to happen during the game, and he instead waited for good opportunities to present themselves before asserting himself.  The same can be said now–let the market come to you.

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