All Hail the 1040 Gods!

__________

MARKET WRAP UP 06/29/10

Days like today illustrate the phenomenon of when a great many market participants hone in on a key technical level. With talking heads on financial television (who usually gloss over technical analysis) speaking in earnest about head and shoulders topping patterns, as well as the all important 1040 level on the S&P 500, it is no wonder the market revisited that level in a hurry today. Keep in mind that we closed yesterday at 1074, and even opened today at 1071. However, that 1040 zone acted like a price magnet, with all eyes fixated to it. I always find it humorous to see ardent fundamental investors, who prefer macro and micro data to price action and volume, all of a sudden become enamored with a certain technical level.

With the S&P closing down 3.10% to 1041, the veracity of the lower end of our recent trading channel is being challenged. As the updated and annotated daily chart of the S&P 500 shows, the channel is widening out. This reflects the sharp disagreement between bulls and bears concerning the value of equities. The last time we saw this pattern was when we topped out in late April. I was much more apt to call that pattern a bearish “megaphone” top because it took place after a sharp run up from February, whereas this pattern formed after a sharp correction. Either way, however, the pattern is neutral at best. Sloppy and choppy patterns with wild price swings are all friends of the bears. (See chart below)

_________

__________

With the arrival of the end of the quarter, combined with the long July 4th holiday weekend, history favors a bounce in the next day or two. Despite that possibility, I moved back to 100% cash within the first hour of trading this morning in order to try to take some quick profits on my hedges, and to avoid any further pain from my longs. While we are certainly becoming oversold, we can easily see another bout of heavy selling tomorrow in order to shake out the complacent dip buyers who automatically assume that 1040 will hold as support. One possibility is a final push down to the lows of Halloween from last year, at 1029. There are also the late September 2009 lows of 1019.

Above all else, the way this market is unfolding, I believe that there are two main strategies for non-daytraders. The first strategy is to simply sit in 100% cash until the market heals itself and becomes constructive again. There is no way of knowing how long that will take to happen. The second strategy is to try to buy sharp dips, such as the one we are experiencing now, and then to quickly take profits into any 2-3 day bounce. After that, you would look to put on some short exposure for the next leg down, presumably playing a broad trading range, with a bearish bias. Of course, that strategy carries the risk of assuming any kind of range will hold.

The bottom line is that we are seeing sloppy charts across the board, in key stocks, ETFs and indices. If you want to trade these moves, being nimble and being correct are essential, as losses will tend to be exaggerated by the size of the swings.

NOTE: The PPT is absolutely perfect for times like these. The Fly posted a screen today inside, for distinguished members, which lists stocks and ETFs that are technically oversold, using a variety of factors, e.g. accumulation/distribution and volume. But The PPT does not stop there. This particular screen then shows how each stock or ETF performed historically, in the days immediately following when they had been previously deemed technically oversold by The PPT algorithm. Thus, you can actually quantify the best ways to play oversold conditions. It is an exceptionally useful tool that will save you lots of time, and will help you to bank loads of coin.

If you enjoy the content at iBankCoin, please follow us on Twitter