Struggling to Defeat the Zombies

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The lack of energy as this trading session has developed is starting to catch up with the bulls, as we are fading a bit at the time of this writing. With zombie banks around the world, not to mention zombie countries overseas struggling with serious sovereign debt issues, there is only so much tread on the tire for buyers of equities to overcome. The potential gap-fill up to yesterday’s open that I highlighted earlier failed to materialize when we fell back underneath both this morning’s lows and yesterday’s intra-session highs. As I write this, I see the market is trying to bounce back, but the individual action in stocks is a bit concerning. When the Nasdaq lags the major indices, as is the case today, it is tough to get too excited about risk appetite.

I still have a few longs on, but am back in fairly heavy cash above 80%. Although the bulls were able to prevent another major dive lower today, and have also held the line at some key reference points, I wanted to see some real energetic buying at these levels. Instead, there is a general malaise over the markets and global zombies which, for all of the talk about the economy and the markets not being one in the same, is apropos.

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What is the best caption for this photo? Have a stab at it in the comments section.

(Jon Corzine off to the left, Anthony Weiner center, and Ted Kennedy sitting to the right)

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The SPY found support this morning after consolidating the opening gap right at the intraday highs of yesterday’s session. Recall that yesterday’s late-day selling was seen after we were rejected at the those highs. As we are currently above that level, a gap fill is certainly at play up to yesterday’s open. In other words, the bulls have a very good opportunity to run this afternoon, and a failure to do so, or worse by falling back below that level, would be a flashing red light to me.

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Another 1%-plus opening gap this morning is adding to the frustration of a great many traders, as the headlines continue to have an obvious effect on price action. As a general rule, I believe it is not the news or data that matters with respect to the stock market, but rather the reaction by equities to said news that tells the story, though there are exceptions here and there with totally unexpected events. Over the years, seemingly great news has, at times, been sold aggressively, while terrible news being bought is often one of the hallmarks of a bull run.

In the current market, the past two session have illustrated that the market can slide down a slippery-slope quickly even after making several weeks of sound technical progress. Today, the opening gap is to the upside, and the bulls have an opportunity to defend the key prior breakout points that I discussed last evening. We should have a better idea by early-afternoon as to whether this move will be faded, but for now these opening gaps are making it awfully difficult to swing trade heavily with conviction. In fact, one of the common characteristics of a healthy, trending market is muted volatility. Obviously, with 1% gaps in either direction commonplace to open most sessions, there is more work to be done in terms of mitigating the uncertainty that persists amongst traders.

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Over the past several months, this market has seen more backing and filling than a dentist with a waiting room full of cavity-ridden patients. Fittingly, the recent multi-week rally through the end of October has quickly fallen back to Earth. The aggressive manner in which this pullback has occurred has caught many off-guard, since a benign consolidation would have made life easier for the bulls, but then again it can be argued that the market’s modus operandi is to render the majority discombobulated.

Putting the ever-changing headlines out of Europe to one side, if you look solely at the price action on a chart like the XRT, ETF for the retail sector, you can see that it reveals we are back to the scene of the breakout. There are also the now-rising 20 and 50-day moving averages that should help add some confidence to potential dip-buyers. Of course, none of this means anything if the buyers fail to step up to the plate, but this setup “should” be a good opportunity for a high probability long upon any signs of stabilization.

Either way, it is tough to deny that many retail plays showed relative strength during the last two sessions’ bloodbaths. If the market does what it “should” here, I am focused on the following ideas.

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