Market Wrap Up 04/30

As many of you know, today marks the end of my month as King of the Peanut Gallery.  I would like to sincerely thank each and every single one of you for being loyal readers and giving great feedback.  Even if some of you have not agreed with me all of the time, you have been great to interact with here.

At the risk of repeating myself from last night, I would really appreciate your support in my candidacy to become a tabbed blogger on iBC, whenever The Fly chooses to hold an election.  I have worked extremely hard these past few months to add value to your trading strategies and market outlook.  I think iBC is a terrific website with great prospects, and I think I have earned the opportunity to help contribute to that.  Of course, without you guys, none of that would be possible.  So, again, THANKS!

The $SPX closed down 1.67% to finish at 1186 today, as the bulls lost the initiative from yesterday’s rally.  Not only did the bulls give up the psychologically important 1200 level, but we are now below the 20 day moving average yet again.  Moreover, the bearish volume on the down days has been consistently overpowering the bullish volume on the up days for quite some time now. We closed today not only on the session lows, but also near a key support level at 1185. If we lose that price next week, I expect that to inspire even more selling.

As I discussed last evening, one indicator worth looking at is the RSI, at the very top of the chart above.  Bull markets typically stay above 50 on the RSI, with 70 being an overbought reading.  If the RSI drops below 50, as it did in late January and early February of this year, it is usually in the context of a fairly sharp correction–more than a mere 2-3% pullback.  In our current market, we bounced off of the RSI 50 level the past two days, only to close slightly below it today.  Keep an eye on that 50 level next week, to see if we continue to weaken below it. As far as the other indicators are concerned, the MACD is sloping downward and giving a clear sell signal, and the stochastichs are signaling a bearish bias as well. Please keep in mind that these indicators are far from conclusive, but they are useful instruments to get an idea of how robust the market internals are.

My daily updated chart shows that we are still working our way through a broadening channel, which is basically the reverse of a symmetrical triangle.  This pattern, especially after a strong rally, is often referred to as a “megaphone” because of the higher highs, but lower lows.  The pattern reflects the increased volatility and struggle in the marketplace between the bulls and bears. Usually, the megaphone is a bearish topping formation and is ultimately resolved sharply to the downside.  After a strong move up, bulls want to see a quiet period of consolidation.  However, what we are seeing now is anything but quiet and orderly.

Thus, my short to intermediate term bets have become more bearish.  I added more short exposure today in the form of $QID and $SKF, shorting the technology and financial sectors.  I still have a very large cash position, and my top long is the stellar $SWHC. Keep in mind that my short exposure is less than 17% of my overall portfolio right now, so I am not advocating an all-in short strategy.  I am merely placing some money where my analysis is, given the charts above.  Anecdotally, I am seeing many traders who have become so accustomed to buying the dip that it seems as though they have ruled out the possibility of a steep correction. Given the evidence that I see thus far, more caution than that is warranted.

I may post something else later this evening, but I would like to leave you for now with something that I have been thinking about lately. Never call yourself a bull or a bear. Being a trader is the only label that you need.  Sure, you can place bearish or bullish bets at any given time, but you should allow yourself the mental freedom to change your mind at a moments notice, if your analysis tells you to. There are no awards for Bull of the Year, nor for bears, so just focus on making money based on the market that you SEE, not the one that you want to see.

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