Wednesday, November 11, 2009
1101 Broken in the S&P; I'm Waiting to re-Short on Weakness
My sincere apologies to you all for posting so late on a very important day. I have not been feeling well this morning, either due to the Thai Chicken I had last night or because I saw the S&P broke above 1101 today. I'm still not feeling well so I'm just going to run off some things I think are important for today:
I share in everyone's frustration today in seeing the S&P give us yet another fakeout, and making a new high. I solidly believed that 1101 would hold for a long long time. I was clearly wrong. However, with that said, the long term bearish case is still well intact as long as the S&P trades beneath 1576. Obviously that doesn't do traders much good, but I'm saying it so I don't lose sight of the bigger picture just because I was wrong on the short term picture. The composition of this market rally is that of a correction, a bear market rally, i.e. declining volume, choppy overlapping waves, optimism extremely high after only retracing 50% of the previous decline, and the fact that the rally followed a clear 5 waves down from the 2007 lows. This all tells us that the 1576 S&P cash level will hold, and that 666 will be broken in the coming months. The extremely challenging task has been to "call the top", and assessing the short term structure.
With that said, the market remains very fractured, and although the main indices confirmed the Dow's new daily high today, the Russell 2000, XLF, NYSE and Dow Transports and Utilities still have not. So what I said yesterday still holds, the Dow is "running the wrong way" and it appears the S&P and Nasdaqs are just slowly peetering along for the moment. Keep in mind that the Dow only has 30 stocks in it, so a 30 stock index is leading a stock market that is composed of over 5000 stocks. You can also see that the last two rallies to new highs in the S&P have been done so on declining volume from the previous declines (see attached chart). So the masses come in and sell, and a small amount of bulls trading a small amount of stocks, push this market up higher. This is classic topping behavior.
So there you have it; I was wrong on the short term picture but still remain bearish on the market, with the same positions in that I had all week. With no clear signs of a top in place right now, and no real stop loss level clearly defined, I do not want to make a short term bear call right now. So right now I'm short term neutral as far as forecasting goes. My plan is to let the market play out in the coming days and wait for weakness to return again. When it does, you can be sure I'll be here again, pounding the table making the case for the best positions I see available.