Friday, December 12, 2008

Signs of a Rally at the Open; Dec. 12, 2008

The auto bailout failed in the Senate and chaos rang out in the overnight overseas sessions as markets sold off fiercely to include US stock futures. We’ve seen this before, and it usually results in a rally at the open of the cash market. That’s what happened today. I have a lot of long positions on so it was decision time this morning of whether to sell into the rally assuming the markets would continue lower, or buy into the rally assuming people will buy the dip and the panic. I closed a small short position at a nice profit and tried to close another one at a better price but it never reached it. I wanted to look at two things to see if the decline would continue or not: 1) the performance of the Nasdaqs; and 2) breadth. As you can see on the above 3min chart of today’s action (the orange line represents the Nasdaq 100 and red/green candlesticks represent the S&P) that the orange line representing the Nasdaq 100 is well above the S&P. So the Nasdaq has been much stronger today. Plus breadth started extremely weak but strengthened as the day wore on (see bottom indicator on chart). Then I looked at all the small cap indices and they were all up sharply just like the Nasdaqs. These are all high risk indices so when fear enters the market these tend to be much weaker, but when confidence is in the market these indices go higher. So it was strange that under such dire circumstances and a huge sell off over night and at the US open that people would be diving in to buy the highest risk assets available. This all warned of a rally coming later in the day. So I held onto my long positions and so far it’s proved a wise decisions as all three of the major indices are trading in the positive now.

My projection is for the S&P to rally to 950, but with this deep decline yesterday and early this morning, I might have to move the target down to about 920-930. Once the market reaches that area, it’s at severe risk of a massive selloff in a short period of time.

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