The Video Game Restarted Instead of Crashing

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In the midst of Wednesday’s bloody sell-off, I penned this post discussing the idea that leading up to the plunge we had seen more and more individual stocks setting up for potential long entry points. With that in mind, the issue was whether a one-day selling event would serve as the impetus for a vicious trap for bulls to fall into, or whether it was a mere shakeout.

The analogy I made was to pressing the “Restart” button on a video game with those long setups. In other words, even if you are making progress in a video game, you may very well not be able to conquer the whole thing. Thus, a simple reset will give you some more time to master the game fully. In the current market, many stocks seemed like they simply needed more time in light of Wednesday’s sell-off, as opposed to being prepared to completely fall off a cliff again like they did this past summer.

I remain skeptical that we are going to see an “easy’ market like in the fall of 2010, where a rising tide lifts all boats. As an example, I am still short AAPL. However, I do think it is noteworthy that even after Wednesday a marquee cloud-computing name like CTXS (no position) failed to even come close to filling its downside gap. In other words, I am seeing more shades of gray than anything else, though the bulls are showing more feistiness than the bears after Wednesday has seemingly proved to be a video game restart instead of crashing the whole system.

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My FIRE long is way out in front of this market, which is impressive considering how much the indices are up. Moreover, my lone short is AAPL, which continues to lag the market. All of my trades are timestamped in our state of the art chat room (we just made some incredible upgrades too) and sent out to members via email alerts inside the 12631 Trading Service. That said, I think you guys know that I have been openly discussing those trades and points of analysis here on my iBankCoin blog in recent days and weeks.

If nothing else, this morning’s action proves that the sell-off we saw on Wednesday was nowhere close to having the legs the bears wanted. We are still in a turbulent market, flying through the clouds of those longer-term moving averages on the S&P 500 that I have been outlining in my video market recaps. That said, the more names like FIRE that are permitted to execute mulit-quarter breakouts, the more I believe the bulls will be that much closer to seizing greater control of this market headed into the end of 2011.

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Direct Vimeo Link Click Here

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Fun Fact: The lower monthly Bollinger Band on GMCR is currently below $0, and the middle band (20-period monthly moving average) has been breached with ease.

Generally speaking, a break of the middle band places the lower band within the sights of bears. While I do not think it is much of a possibility that Green Mountain is going out of business anytime soon, the comparisons to Netflix’s monthly chart that I have been drawing for some time now remain relevant. Read my posts here here and here for more on that comparison.

In sum, momentum cuts both ways. Just as Green Mountain rode above the upper monthly Bollinger Band for quarters on end, do not rule out a nasty ying to this yang. In other words, I do not believe the inevitable relief bounces in Green Mountain are even worth playing yet.

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With the big moves in both directions, it is tough to gauge who really has control of this tape for more than one session. Looking at a 5-munute chart of the IWM, ETF for the small caps, you can see an inverse head and shoulders forming. This should be an excellent litmus test to see whether yesterday was simply a violent washout, or if it was the start of the bears seizing back control of this market. Watch it closely to see if it holds, and we get a clean pattern. I am looking for $72 to be the line in the sand for the pattern to stay true.

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