What to Do.

As it stands, it looks like we’re going to gap down pretty close to the 820 level.  We may slightly drift down and bounce off of 820 (835 on a smaller gap at the open) and bounce to the 850 level or 835 in the case of 820, or a combination of both. After that, if we don’t start filling the gap within 30 mins, the market is in some serious trouble.

820 is the key support here. After 820, there’s nothing that will hold back from the market from re-testing the 750 lows. The worst thing that can happen is if the market sells off so hard at the open that we cut straight through 820 immediately. In that case, start scaling in short positions immediately.

Otherwise, I suggest waiting at least 20-30 mins to see how the gap will shape up (look at the blue lines and watch if the market is getting boxed in). I would add significant short positions on the first failed bounce. If you have longs, this would be your opportunity to sell out at a slightly higher price.

I would not dump all my money all at once into short positions, but rather scale them in.We could form small flags/wedges, triangles almost immediately for better entry points.

The possibility of a major rally is present if Bush/Hank/Ben decide to manipulate the markets. A surprise press release should be expected. Therefore, it is important to have enough reserve buying power to hedge in case of unexpected bullshit Magic Jack trickery.

If we do appear to be rallying non-stop, then, well, stop shorting lol. If this gap fills, I would be shocked. If you can’t be at the computer all day, then you probably shouldn’t trade. Today is not a day to be casual.

A gap down at the 840 SPX level will immediately break the bear rally’s uptrend. If we continue the momentum, and the market closes down over -6%+, then this gap is likely be a continuation gap. I also expect considerably larger volume today. Obviously.

The difference between this -3% down day is that the market is no where near the lower Bollinger band. We could see an acceleration of sell which will expand the bands, giving room for several days worth of selling.

I already have SMN and SRS, but I’m going to be messing with those 3x ETFs. I think they’ll do well today.

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What can you do during an intraday breakdown? Take the opposite side, hedge, or get into cash. I used my hot keyed SMN and SRS for the first time. You still have to keep your mind open because anything is possible (as always). Things happen that are beyond anyone’s control, so you just deal with them and move on. You either adapt or you’re dead.

Today’s pattern consisted of the smackdown from that 905 SPX resistance level (actually), but a final breakdown of the 885-890 SPX support level was unanticipated until it made it’s way down there, obviously. Once the market got to the 885-890 SPX level, the probabilities changed immediately. The risk/reward profile shifted. The beauty of technical analysis is that the patterns evolve every second of the day and you can stack the odds in your favor as the picture slowly forms.

Believe it or not, we’re still in the flag. A -195 point move on the Dow is nothing compared to some of the declines we get. If we break this channel, we’re done. The flag would fail entirely.

Looking at the volume, it shows that we’re still consolidating, so don’t get too excited about anything. If it was a genuine breakdown, it would have been on high volume.

875 SPX is the immediate support level and the 20-day MA at 860 SPX provides secondary support. Immediate resistance is at 885 SPX and everything above that.

Due to the uncertainty and the desire to protect profits, I chose to remain hedged @ 40% long/60% short. The only way I get heavy on one side is if a clear direction is achieved. Advice from my post yesterday: day trade, hedge (swing) or get into cash during consolidation.

UPDATE: Futures are down like mad. If this keeps up before the market opens, then we have “officially” broken, and a flurry of selling will ensue. I will look to short the hell out of this market at the most appropriate time.

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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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We formed an inside day. Technically, the market can go either way, but it usually marks a period of consolidation which marks a continuation in the trend. The market (SPX, DJIA, COMP) is sandwiched between the 30-day MA and the 50-day MA and there’s going be more neutral trading.

Volume has also become increasingly light. Typically on a breakout, you see huge volume, and during consolidation, you see declining volume. We are seeing the second but we didn’t see the first, and that alone can be worrisome.

Still, the market remains in a neutral range bound by the 50-day MA and Monday’s gap. As long as the market doesn’t breach 880 and breakdown, then the bulls still control the market for the short-term. As of today’s action, the breakaway gap still stands and judging by the action in the last 2 hours, we could be setting up a small double-bottom.

What I’d like to see is a break out from the 50-day MA, but that is probably too much to ask for. If we form a bullish stick sandwich and cancel out today’s loss, then that would be bullish enough. I think the smartest thing to do is to have a large cash reserve to take up positions once we leave the consolidation zone.

My two biggest plays today were long DRYS (since yesterday) and EXM (this morning), bringing me up to a +18.4% gain for the month so far. I got smart this week (vs. last week) by getting into a 50% cash position and cut out all leverage. Those we’re heavily-concentrated allocations for my spiker strategy. Typically, these same names turn into short candidates once they run out of steam, enabling you to profit from them on both sides. Always look out for spikers for a quick day trade or 2-day hold.

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Good day for the bulls. We gapped up so hard that we not only filled Monday’s gap (requirement #1), but we also surpassed 11/28’s high (requirement #2). This was an immediate breakout and it was sustained throughout the day and it was a “Buy”. This seems like it’s mostly due to short-covering and the GM bailout. A lot of professional money remains on the sidelines.

Therefore, the problem is the volume, again. It’s rising slightly higher on a daily basis, but I was expecting much more. This lack of price confirmation has made me cautious and signaled to cut half my long positions and get into cash. It’s only “ok” if the volume is just sustained, but that just means that there are a lack of players in the market.

Some caution — We are only a few points away from the 50-day MA, which is resistance that we last hit in September, and failed. What should you expect tomorrow? A down day is very, very possible. I will most likely sell out of all of my longs sometime tomorrow. Look for 930 SPX. If we do rally above the 50-day MA, then I’ll sell anyway to protect profits in an overbought environment. Keep in mind that the last time we did hit the 50-day MA was right before the October crash.

The 30-day MA has become support after 6 failures. If we do have a down day, I don’t expect the possible decline’s close to exceed the open-close range of yesterday’s action. For swing traders, I’m looking at a decline of no more than -1.5% on volume that does not exceed yesterday’s volume. The 20-day MA is no longer a threat.

All in all, expect a pullback at a minimum. I don’t expect a major breakdown and we may continue to flag at the handle portion of a “cup & handle” formation. We’ve exceed all major short-term resistance levels and they have now become our support. Again, I’d like to see some greater volume to confirm price action. On the 5- and 10-day charts, we see a diagonal channel. I’d like to see no breakdowns from the channel.

If you made some money, you’d be better off taking some of it off the table and waiting for a pullback for a possible re-entry. Look below and write down all the key levels for the next trading session and don’t forget them. It prevents impulse trading.

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I have come to the conclusion that the probability of a nice-sized rally next week is pretty high. I won’t abandon the bear camp entirely because I do see at least another leg down sometime in the unknown future. The possibility of the rally extending for some time is on the table, therefore, it’s important to remain flexible.

The bullish case:

1) The tremendous strength displayed after the most important economic report was released is simply astounding. It is unreal, yet the market’s reaction must be fully respected, regardless of opinions. The price action said a lot.

2) We were unable to break SPX 802 after numerous attempts. We also broke through major resistance levels, including a clean close above the 20-day MA. The 820 level is amazingly resilient and an inverse head & shoulders may be underway.

3) We’re forming bullish stick sandwiches on every index. Volume remains steady.

4) We’re actually within striking distance of the 50-day MA, the all important fluid intermediate-term support/resistance level. Before, we couldn’t even get close to this moving average.

5) The health care, consumer discretionary & staples, technology, utilities, financials, and other sectors and industries (minus energy) are showing significant strength and have either broken their primary downtrends or are threatening to. This assessment is significantly different from last week.

6) Shorts who have shorted within the past 10 days will most likely cover their positions if we reach one more solid up day.

7) The VIX broke the 50-day once again, and this has been the 7th test. The VIX is starting to get more down days than up days, signaling more potential downside.

8 ) Various technical indicators are showing large divergences between the indicators themselves vs. price action.

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The “Iffy” Case:

1) Uncertainty. Anything can happen unexpectedly that can drop the markets faster than you can say, “ohhhhh shiiii”.

2) We are forming a multi-day short-term neutral range, a 10-day symmetrical triangle, and a 1.5 month semi-descending triangle. Any breakdown below SPX 900 is bearish. A major down day on HUGE volume would nearly negate everything supporting the bullish case. The volume is key though.

What I hate:

1) The abundance of pattern failures. Triangles that don’t break, unexpected rebounds, etc. All that crap that doesn’t even allow you to leave your computer just once to take a piss in peace.

I’m going to have to lean toward the bullish side until the trend changes. In my post on Thursday, I stated that we needed to fulfill two steps. We did with the first one, but we were unable to breakdown below 820, or step 2. This was extremely important and it didn’t happen. I’m not going to go bullish unless 1) Monday’s gap fills, 2) we get a nice consolidating base, and 3) we rally strong on volume. If it’s anything less than that, then we’re going to drop back into the range. 875-880 is the ideal bounce off level.

Don’t get too comfortable. This bear is hardly finished tearing off people’s heads. I am neither bull-biased nor bear-biased, I only care about the direction. We may finally be climbing a “Wall of Worry”, but keep in mind that this bear market is far from over.

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