Today’s action was one big rollercoaster that brought traders on in the morning, and threw them off in the afternoon, only for it to pick up people’s broken bones in the last hour. Today was definitely a difficult day to hold as we formed the third day of a bull flag. If you were like most traders in the morning…by the end of the day, you sat there, wiping the sweat off your brow (after using the bathroom for the first time since 9:25AM) and shouted, “WTF“!!!
The most likely scenario is that we breakout above 920 SPX within 1-2 days. The other scenario is that the flag fails and we breakdown, starting a perpetual multi-day sell-off which I will gladly participate in. The former holds the highest probability, by far. Tomorrow, expect 905 SPX resistance per the 3-day chart. The 50-day MA remains as the largest point of resistance to a breakout.
It’s healthy if large volume accompanies a breakout and it slowly declines during a consolidation. What you don’t want to see is high volume during consolidation, especially on the down days. The volume signifies that the people that have been buying for the past several days are actually holding their positions. As supply is absorbed, a breakout ensues. The biggest news item that can kill this process is a negative reaction to the auto bailout.
As for my trades, I remain in my materials/industrials with a load of coal, steel, and energy stocks such as ACI, BTU, MEE, ATPG, STLD, ANR, and many more. I also have retailer ANN for some reason, and that P.O.S. REIT named PLD, both as base breakout/momentum plays. I sold out of DRYS@$11.61 (bought @ $6.46, +80% gain) and EXM@$9.01 (bought @ $6.49, +39% gain) early this morning, both having made up a total of 30% of my portfolio. I suspected a doji day, a typical characteristic of spiker plays after 2-3 days. This pushes my December monthly return to +27.2%, lead by the materials/industrials.
For tomorrow, watch the key immediate support level around 887 SPX and if needed, another trough in the flag to 880 SPX. Watch 905 SPX for a smack down from the upper range resistance level. As I write this, the House is getting ready to vote on the auto bailout bill. Obviously, the outcome of the vote will have an effect tomorrow.
Typically, it’s smart to be hedged in some sort of way while you’re swinging along during consolidation. For people who are still throwing up after getting off the rollercoaster, just stay in cash.
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