Familiar Battle Line

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Recall how often I have mentioned the 4,700 level on the historically market and economy-leading transportation sector, via the Dow Jones Transportation Average. Indeed, the 4,700-5,000 range had represented the recent struggle to break out from the summer trading range. The selling over the past two weeks had the bears winning that particular battle, pushing price back below 4,700.

You can see on the daily chart below that even with today’s monster rally that 4,700 level remains a serious battle line. A mere bounce up to it should come as no surprise from oversold conditions. Soundly recapturing it by the bulls, on the other hand, would be more indicative of the potential for something other than a simple reflex rally.

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Trading sessions like today show how dynamic the psychology of fear can be in the markets. On the way down, there is great fear amongst traders of getting caught long during a crash. That can quickly shift when we see a huge gap higher like this morning’s, where all of a sudden the fear actually morphs into one of missing out on a spectacular rally. In this day and age of social media and internet, allowing both types of fear to seize control of your trading via egomania can do great damage to your portfolio. One of the recent themes of my posts has been using social media as a trader to your advantage, rather than allowing it to adversely affect your craft.

A better approach is to check your ego and acknowledge that just as good poker players often fold winning hands, good traders often take a pass on potentially profitable trades. There are simply too many stocks and sectors that makes moves on a daily basis to catch all of them. Indeed, in this life, you can anything, but not everything.

The market has done very little since this morning’s opening gap higher. Price has essentially gone dead, as you can see on the 3-minute chart of the SPY below.  The VIX remains stubbornly above 30, which is problematic for me in terms of putting on long swing trades with any type of conviction to hold for more than a few days. Thus, I am still being selective in my long ideas, preferring to focus on clean charts such as SWI, which is above all moving averages and capable of a breakout should the market improve.

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The huge opening gaps across the board appear to be holding up quite well after the first ninety minutes of trading this morning, offering up hope to bulls badly underwater on positions from the past two weeks. Virtually all of my channel checks for risk appetite are confirming this move, namely the Euro, Freeport, and the strong action in energy stocks. If you were all-in long, positioned for this move while enduring last week’s pain, then you are feeling much better today, in lieu of feeling like a sucker last week getting hustled out of a Thanksgiving rally. Emotions aside, though, the pertinent issue for me is whether to allocate fresh capital here to the long side. The answer is it largely comes down to your style.

When I see a daily chart like the XLY, ETF for the courser discretionary sector, gapping up directly into moving average resistance, I am inclined to show some more patience here and not feel compelled to chase too much. That said, I will be running all of my screens inside The PPT as this session develops, keeping an eye ouit for potential trading ideas.

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Futures are screaming higher on Sunday evening, up over 2%. As I discussed on my video recap last Friday, the issue was whether a bounce from oversold conditions would even be worth playing. One of my main disciplines as a trader is largely sitting out and observing the first 30-45 minutes of trading every session, when volume tends to be anemic and price swings wild. As a swing trader, this enables me to get a feel for the action, without losing capital trying to figure it out. Moreover, there are few occurrences in the market that do more damage to a trader’s psyche than consistently chasing an opening gap in either direction, only to see it faded aggressively after the initial move.

First and foremost, there is an awful lot of time between now and Monday’s opening bell. So, the rally may become a moot point if we wake up to a flattish open. That said, should the bounce stick I am watching to see if it survives past the first hour of trading. I will be watching all of the usual suspects that are proxies for risk appetite, including the Euro, Freeport McMoRan, consumer discretionary plays, and energy. A gap up from oversold conditions is generally not favorable to swing traders looking to initiate fresh longs. I would prefer to see the bounce faded initially, and then make an afternoon push.

From a broader perspective, regardless of whether tomorrow’s bounce sticks or not for a quick trade, I remain very concerned with the weekly chart of the Nasdaq Composite Index. As you can see below, the threat of a weekly breakaway gap demands my respect, at the very least. Note that we have not seen such a visible gap down with a bearish marubozu candle since the October 2008 crash. Hence, I will most likely remain highly cautious on the long side until that gap at least becomes somewhat filled above 2.540.

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The chart of Goldman Sachs remains ominous, as you can see the longer-term look below. On the monthly chart, note the huge “void,” or air pocket, that was created with the 2008 crash and subsequent V-shaped recovery in 2009. A consequence of these air pockets is that price can move quickly once it gets going back into the void, with little memory to get in the way. There is some support in the low-$80’s dating back to 2004 that bulls are counting on for now. However, if price moves below this area I expect a fairly quick retest of the 2008 lows of roughly $47-$60, as scary as that sounds. Watch the low-to-mid $80 closely.

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One of my favorite femme fatales is Lena Olin in the over-the-top noir, Romeo Is Bleeding (1993), with a top shelf cast including the estimable Gary Oldman as the lead.