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Joined Apr 1, 2010
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Vince Lombardi’s Take on Today’s Market Action

[youtube:http://www.youtube.com/watch?v=ocV5bGHdYag 450 300]

BOTTOM LINE: More patience, grasshoppers. If, indeed, we are going much higher, then a few days of consolidation is to be expected. Of course, we could be consolidating before making another leg down, which is why I am content to sit in cash and let the market sort itself out. I know I am not winning any balls of steel competitions with my 100% cash position, but I could care less. I trade to make money. What do you do, sir?

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Midday Market Update

After a sharp gap up this morning to 1090 on the S&P 500, the market is now chopping around after a bout of profit taking.  So long as there is an underlying bid, we should begin to stabilize and follow through on yesterday’s hammer. If we are going to improve to a healthier market, then you should expect a fair amount of backing and filling.  A “V” shaped exuberant bounce to heavy resistance levels would likely invite significant profit taking, and allow bears to confidently reload their short positions. A slower, steadier stabilization process will give many charts time to heal and also help to form a sound base.

I am seeing some enticing setups for breakouts, such as $SNDK and $ORLY. However, keep in mind that in corrective markets, many setups break your heart and fail at the very last minute.  For now, we will let the big money bulls do the hard work for us, in terms of trying to provide a floor under this most recent selloff.  Our best risk/reward entry points will be if and when we see benign consolidation after a strongly bullish day or days.

Finally, here is an updated monthly chart of the Euro ETF.  I am now expecting many of the savvier shorts to begin covering and taking profits, seeing as the steep decline has more of less filled the gap dating back to 2006.  Given the sharp decline we have already seen, combined with main street news media declaring the death of the currency, it is important to remember that greedy bears are just as prone to being “bag holders” as are greedy bulls.

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Hammer Time


I would like to focus this post on two main issues:

1) Whether today marked some sort of intermediate term bottom, and

2) Whether we will see confirmation of today’s impressive intraday reversal by the bulls.

Both of those inter-connected issues revolve around the type of candle that we printed on many (but not all) of the daily charts of the leading indices and sectors.

In Japanese candlestick terminology, a bullish hammer often signals a trend reversal.  Above all else, the hammer  (on a daily chart) shows that the price drops significantly from where it was at the opening bell, yet rallies back towards the end of the session up near the opening price level.  Some key elements are: a prior bearish trend, little or no upper wick to the candle, and a small body at the top end of the hammer.

The updated and annotated daily chart of the S&P 500, seen below, should illustrate to you what a hammer looks like, based on today’s price action.

Note that in early February, that particular correction ended with a bullish hammer as well.  However, in order for us to find some enticing swing setups on the long side, we still need to see some follow through by the bulls in the coming days.  What we are looking for is stabilization in many charts of the indices and individual issues.  The most bullish scenario would be to see accumulation by the big institutions, which you should be able to see via strong buying volume, combined with charts building sound bases looking to catapult them higher up through tough resistance levels. Before we jump the gun, however, it is crucial to remember that we are still in a steep downtrend. We should not be making bold bets for anything other than a scalp, until we see more than one impressive day by the bulls.

It is also worth nothing that the market found support today right at the lows of February, in the 1040-1050 range. Although we made a marginally lower low, the bulls still presented themselves in a forceful manner. Thus, the issue of whether today marked any kind of intermediate capitulation remains to be seen in the coming days, but is indeed promising.

As I noted this weekend, the small caps and trannies have been showing us bullish divergences, as neither of them have closed below their respective 200 day moving averages.  Their updated charts, seen below, reveal continued relative strength.  This is particularly promising to the bulls, as both the trannies and small caps are historically market leading/confirming areas.

I suspect that all of these bullish divergences and hammers are causing those of you who have been waiting patiently in cash to lick your chops.  As I noted today, I sold off my remaining “swing scalps,” and I am back to siting in 100% cash, so I, too, am chomping at the bit to get involved for longer term swing trades. However, we still need to hold off for now.  That could change very quickly in the coming days, so the best idea I have right now is to assemble a watch list of charts that have held up well throughout this correction. If we see confirmation, I am eager to start posting extensive lists of individual setups for you again, as I did when we had a healthier market in late February, March, and early April.

Finally, note that the correction we have seen thus far has been more ferocious and technically damaging than any other selloff since the beginning of the March, 2009, bull run.  Therefore, healing the wounds on the charts and forming a healthier market for swing trading is going to take time, and require some tough work by the bulls.  Instead of exuberantly flying in off of the sidelines at a possible reversal, the better risk/reward strategy is to closely monitor the action, looking for signs of stabilization and accumulation.

If the follow through never comes to the upside, however, then we will still be in an ideal, heavy cash position waiting for a true bottom.

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Despite how oversold we are, I am going to stick to my discipline. Just as I will not turn swing trades into long term investments, I will not turn swing scalps into longer swing trades.

Thus, I have fully sold out of $AKS, $GS, $DVN, $AKAM and $PPO, and I am back to being in 100% cash.  I detailed all of my buys and sells in The PPT, with timestamps and all. $AKS was the only profitable trade of the above mentioned stocks. For the rest, I took single digit percentage losses.

I have to say that I am not seeing the type of fear that I expected to today.  There seems to be a little too much “business as usual” attitude amongst traders.   In my estimation, there is just as much risk to another downside woosh, as there is to a sharp rally.  So, I am back to being a spectator until further notice.

I appreciate everyone who chimed in on my open forum thread last night.

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Well, perhaps not.

However, with the futures down big, we appear set to open below the recent 1055 low.  Moreover, we are not far from challenging the early February lows of 1043 on the S&P 500.  Undoubtedly, we *should* have been able to muster some kind of rally on Monday and going into Tuesday.  The fact that each bounce has been aggressively faded is troubling.

I would like to hear what you guys think.  For those of you up late tonight, I would like to know:

1) Do you expect a morning gap down to be aggressively bought, or do you think we will have a complete washout?

2) What is your game plan? Buy the dip? Put on some daytrading shorts?  Stay mostly in cash?

Consider this an open forum.  You can vent, ramble, tell dirty jokes, etc..

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