conflicting signals

today was a healthy day, a consolidation day ... kind of a boring day ... relatively flat all day.  With that said, this is pretty much the best outcome I could have hoped for given the extreme overbought levels we were (and are) at.

When markets get to extreme levels they can correct in one of two ways - through price OR through time.  Today's price stability let off some steam preparing for a new move up.  We are not ready to go up yet, but it was really good to see that the market held strong and didn't fall on its' own weight.  In yesterday's post, I was worried about an island top ... which of course didn't come.  It still can come, but good to see there wasn't a drastic reversal.

I am seeing very conflicting signals in my analysis, which i supposed kind of makes sense based on today's non-movement.  there is indecision as to whether the market wants to go up or down at this point.

time for a breather

wow, what a stellar day!  News from Europe (which I won't bore you with) caused great elation in the markets pushing them significantly higher.

The SP-500 finally gapped over and closed above the 200 day moving average, a very bullish signal, although I expect it to falter through this average a few times in the future, most institutional investors will use this as a sign to get long (versus short).  Does it mean trouble is over, not at all.  just a psychological wall we were able to get over. 

The Nasdaq did this on 10/12 as has been firmly over it ever since

The Russell 2000 still has a ways to go to get over its' 200 day, which I assume will provide some resistance.

I want to repeat my concern from yesterday ... we have come A LONG ways from the bottom VERY quickly and we are now grossly overbought which means we will have either a decline OR at least relatively flat consolidation for a few days.  The market can stay overbought for awhile, but after today ... it is at extreme levels. 

In fact, 45% of the market that I track (1500 of the largest companies) are above their upper bollinger band, which is 2 standard deviations above their 20 day average price.  Stocks usually only stay above (or below) their BB for a day or two and then fall back into it.  with almost half of the market there ... we won't stay this overbought for long.  In fact, the last time we were this overbought was on July 1, 2011 which was three days before we hit the top and fell hard from there.  I am certainly not predicting that we will have a similar decline, just want to emphasize that caution is in order.

more resistance ahead

Today was a very healthy up day with some consolidation mid day, but more so ... exactly what I had hoped for (from yesterday's post), a downward movement of a few percent, then a move up to reverse the downside and close at the top of the day's range.

To test new lows and quickly rebound and close the day at the highs is very constructive price action and speaks loudly to the players that the market wants to go up. 

Can't say I didn't warn you

Well, we got what I suggested in yesterday's post.  A significant down day ...Nasdaq and SP-500 was down 2% and the Russell is down 3%.  I think yesterday that I expected a 2 - 3% decline in the coming days.

Although the decline was controlled which is nice to see, it was significant and more importantly it completely reversed yesterday's strong day which definitely is not a positive sign.

a healthy recovery to date

I haven't posted in awhile since I didn't see much difference in the internals to comment on ... We certainly have had a very nice recovery so far with all indexes gaining over 10%-12% for the month of October, and much more from the bottom that happened on 10/4/2011.

not much of a surprise today

Well, as I suggested in Friday's blog post, we got the correction I anticipated.   I hope you followed my suggestion to sell everything and put the cash under your mattress for the next 13 years :)

contradictions??

I received a question from a reader whom I respect greatly and thought it would be good to answer to the group.

This reader said ...  

wow, what a week!

Wow, what a week.  If you had bought into the market on October 5th, the day I emailed all to do so, you would be up roughly 10 percent (even higher if you bought the nasdaq).  It has been a nice run to say the least.

The market is in charge here ...

I ended yesterday's post with ... I generally don't trade counter to the market as I think it is asking for losses, but in this case, my risk/reward probabilities are quite enticing ... so I take a small nibble at the short side of the market.

Well today I got nibbled ... I shorted at the close last night and got stopped out at the open today.

The market has proven resilient and that at this time it wants to continue higher.  Fighting the tape will make you broke and today was a reminder of that for me.  I saw weakness and did not wait for confirmation on this and as a result got burnt.  A small burn mind you, but burnt nonetheless.

not convinced again ...

well, today we had very little movement which is normally fine, but the volume is quite light which tells me there's a lot of people still on the side lines waiting for the market to tell them what to do.  In my end of day analysis I had a few indicators come up with bearish signals.  This coupled with the fact that most of the indexes are very close to their 50 day and 200 day moving averages which always provide a slight hurdle to hop over (in either direction), I'm assuming we will have a down day tomorrow.

As you saw earlier, I cleared out of most of my long positions over the last few days, and am going to very lightly short the market in the morning.  If we open with a strong gap up, I will be stopped out immediately and will happily admit that I was incorrect.

With this said, at this point I am still intermediate term bullish, just think we have some downside to experience before we will be ready to move up.  I think if the buyers were coming in and interested in moving this market, they would have already done so (today).

I generally don't trade counter to the market as I think it is asking for losses, but in this case, my risk/reward probabilities are quite enticing ... so I take a small nibble at the short side of the market.

mostly in cash - intraday comment

tough to do, but I'm told the pros 'sell into strength, and buy into weakness'.  Retraining your brain to act counter intuitively is sometimes hard.  So, I am temporarily out of almost all long (and short) positions.  We are so close to the upper descending trendline and 200 day moving average on all indexes that there is little statistical edge to hanging on to the positions at this stage, the risk is just too great for the reward.

So, sit on the sidelines until the market tells us the next move.  We can either break through this trendline OR have a revisit to the downside.  My assumption is that we will take a fall to get a 'higher low', then we will rise from there.  So, bullish sentiment, but we need to take a break for a bit first.

We have risen over 13% in roughly 6 days from the bottom ... that kind of move is not sustainable obviously ... so a break is in order.

With that said, there have been so many on the sidelines up until this point and probably more worried about 'missing the next move up' than losing their shirts ... so we might have a few more days of strength before we loss a little, or we might just have sideways movement for a few days before resuming the uptrend.

Sit on your hands and wait to let the market show its' hand ... patience is the hardest thing sometimes.

buy and hold

Since my suggestion to buy on October 5th, we have enjoyed a 7.3% gain.  Ironically if you hadn't been in the market for the entire year and only invested over the past four trading days (from 10/5 through today), you would have blown the doors off 99% of all hedge funds, mutual funds, money management firms who are all firmly planted in the negative for the year.  Quite bizarre to think about, but another good example that timing is everything in the market.

Looking back at the market, if you purchased $10,000.00 in an index fund on November 30, 1998 (13 years ago) ... you would have ... ready for this?? ... $10.000.00.  That's right, you would be at break even.  This also applies if you bought in 6/2001, 12/2004, 9/2008.

So, to really hammer this idea home, if you had your money under a mattress for the last 13 years and then bought 4 days ago, you would have done better with much less risk than if you invested in the stock market the entire time.  angry???   I know I am!  And hence the reason I started down this road 3 years ago.

a bit skeptical, but giving the benefit of the doubt

today was another healthy push up with the indexes gaining between 1.5 - 2%.  We have had quite a nice 3 days.

With that said, I don't trust the market yet.  I'm not bearish, but I'm nervous and as a result I pulled some profit off the table today near the end of the day, and tightened stops on a few positions that I dont want to go negative in.

Tomorrow is a critical day, and if this upward movement is to continue, we probably need to gap higher at the open. 

not as much strength as I would have liked to see

I was a little disappointed today with the strength of the move.  Although we saw a roughly 2% gain in the indexes, I felt like there wasn't much punch to the move.

time to buy?

If you were looking for a time to put some money into the market, it might be now.

Saw some serious strength yesterday at the close.  The market was down over 2% and then rocketed up at the end.  At the bottom it was the lowest point in over a year, then in the last hour of trading, the market rocketed up.  The strength was mostly short covering, but no sellers means no more down side.  We need buyers to step in to truly reverse the direction, but I am anticipating this will start happening today as large players see the market start to stabilize.