Stock #Market Recap 12/19/11 {Video}

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As we count down the final trading sessions of 2011, the idea of playing the traditional bullish holiday season has led to many bulls finding themselves trapped in this market. Bonds and the U.S. Dollar continue to show impressive strength, which tends to bode poorly for global risk appetite, as per the correlations over the past few years. Moreover, the Euro remains under pressure and could easily be going sideways here before eventually breaking even lower. Again, this has historically put pressure on equities, as a whole. Global markets also remains under pressure, in addition to the spike down we saw today here in America, out of the bear flag/base I had highlighted earlier today.

However, it is important to not write everything off, just yet. Even if we close at the lows today, there are still eight sessions left in 2011, which is plenty of time for all kinds of moves to happen. Psychologically, it looks like the bears smell blood here in breaking Bank of America below $5, and you can bet they have the 1200 level on the S&P 500 in their sights next. Indeed, the key for me to stay away from longs was seeing the 1225-1230 level lost last week, and since then it has turned into tough resistance. Just as prior resistance turning into current support is an important victory or bulls, prior support turning into current resistance is a notch in the bears’ belts. And I am going to respect that until the bulls can reassert themselves again.

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Since topping out after its post-bear market bottom rally in April 2010, Bank of America has been in a firm downtrend, as you can see below on the extremely zoomed-out chart. The financials as a whole have more or less followed suit, albeit not quite in as dramatic fashion as BAC. At various times, I had been looking for a reason to trade the big bottom in financials, but the follow-through was never there. There have been reports that the $5 level in Bank of America’s stock must be defended by institutions in order for them to continue to hold the stock, else face forced selling.

As 12631 member “kelkun” noted inside our chat room today, it is tough to see an edge in the trade with so many eyes watching that $5 level. Bears are going full-tilt to break it, while bulls are putting their faith it holding. When situations like that arise, there are usually quick headfakes in both directions, without much overall progress being made other than to shake both sides out of their positions.

The bulls hope that all of the bad news is baked in the Bank of America cake. The problem with that thesis is that hope is not a trading strategy, and there is little, if any, technical evidence to support that view yet. That might eventually change, but with so many eyes watching $5, I have a hard time believing the market will make it that simple.

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5-minute chart of the SPY, intraday look. The reversal lower this morning has led to us going sideways over the past hour of the session. It looks to be a textbook bear flag that should resolve lower, so bottom-fishing bulls should have a quick exit strategy here. However, volume is light this week and will only get lighter as we get closer to Christmas, so it is tough to trust this market long or short. Best to keep a tight leash all positions and ideas here.

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Generally speaking, swing traders are placing low probability bets in being aggressively long with a declining 200-day moving average, especially when individual charts are not flashing enticing setups. Currently, the 200 day moving average on the S&P 500 Index is still sloping down, as I have been noting on my daily video recaps. That has been one of several other reasons why I have stayed in heavy cash at various times over the past few months. Of course, the question then becomes,”Why not aggressively short?” The answer is that we are still siting on the fence right now as to whether we are in a bear or bull market, cyclically speaking, as we muddle along. Again, this is all the more reason why high levels of cash are sometimes necessary and appropriate. Please read this post for more on the subject.

In the short-term, I am looking at 1225-1230 closely on the S&P. Above there, and I will consider putting on longs. Recall that after we sold off in the early part of this past week that zone turned into resistance, including some nasty morning gaps higher that were faded. Above that level, and I am willing to quickly look to gain some long exposure. As long as we stay below it and churn, though, I see little value in risking dollars to try to grind out a few low probability pennies. This morning, the market once agains found sellers up there.

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Shrinking volume over the final nine trading sessions that remain in 2011 (on Monday, December 26th, the market will be closed to observe Christmas from over the weekend) should come as no surprise to many of you. Seeing as many market players with sizable buying power are already closing up shop and away from their desks, it is going to be tough to assign too much significance to anything that happens in the stock market from now until the first few weeks of 2012. If you have largely kept your capital intact during this basically trendless year of 2011, you will find yourself toughened up and better for it. The market can make all of us look like fools at one point or another, which is why being right or nailing the big, bold call is not what separates the traders with staying power to profit over the long run from those who quickly burn out their emotions and portfolios. Instead, nimbly making adjustments, versus the trader more focused on his or her ego or stubbornness, is what makes the winner.

Looking through my screens this weekend, the best-looking areas of the market are the traditionally boring/unsexy and/or laughingstock sectors such as REIT’s, airlines, a few Dow components, pipelines, and utilities. The “sexy,” risk appetite areas of the market, such the high growth leaders since 2009 and precious metals miners, are still way too loose, sloppy, and vulnerable for me to find a quality long setup there. The financials may finally have a chance here, but my inclination is to still let the institutions do the heavy bidding for me first, before I move in aggressively for swing trades.

Perhaps one area of the market that accurately represents where we currently are is the weekly chart of the XLE, ETF foe energy stocks. I had highlighted the $62/$63 multi-year level as a key reference point at various times over the past few months. Despite the sharp move lower earlier in the fall, the breakdown below that level turned out to be a marginal breach which led to a sharp reversal higher. However, the bulls have failed to follow-through on that move to confirm it, thus far, as we muddle along in search of a clear direction.

Hence, we are stuck purgatory for now, straddling the line between bull and bear, with smart money on both sides of the trade.

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