The Daily Dose of Trading Comments

I'm definitely ready for the weekend and for a new month. This year has proved to be most difficult and sometimes I wonder if I should just day trade and go home flat every evening as I'm having a hard time coming to terms with the notion that this downtrend isn't going to offer any kind of move back to the upside.

We did get some positive divergences today though and the result was a nice squeeze into the close. We also got an island reversal on the NDX on the early push down intraday. I'm not one to say this or that will happen but there are, once again, certain signs that this could mark the needed push that had to happen to actually get the market to trade higher.
I've been whittled down on my longs due to stops and stand at around 20% long as of the close today. When and if we get that push higher, I'll add aggressively using the watchlist I maintain. It's getting old an crimpled at this point, but I can still read the names. If I spill any more hot tea on it though, we may have to start a new one.

Look for another mixed up week next week as the Fed has their say on Tuesday and then we get the employment picture on Friday. We are still in the rectangle doing that rectangle strangle and until that's resolved it's all about trying to maintain your sanity and keep your capital. Have a great weekend.

Volume is running heavy which is exactly what you want to happen on a day like today, and what a day, we gap up, new intraday lows for the year on the NASDAQ and NDX and then a short squeeze back up and it's not quite through yet.

I'm looking for another long trade into the bell and am thinking that Monday opens higher so keep that in mind.

I'm really getting the feeling that this is a setup and we are primed for a huge short covering rally into the close. I would like to see them try to push this market lower on light volume as I'm itching to catch a good risk/reward trade long into the close.

What you have is some shorts who are trapped now. They may not even get a chance to get out of anything at prices lower than now.

We are really thrashing around today and threatening to break out of the bottom of the rectangle. I've got stops on almost all positions and am hedging short as well. This is a time to be careful and to continue to do your best to protect capital. If you are short, a good flush down would be the opportune time to consider the cover as my take is that it the flush would finally set the stage for a rise.

What is this ... Fear Factor? The schizophrenic behavior is wearing me out as we wallow in the rectangle strangle. Yesterday it looked certain at the end of the evening that we were ready to test and possibly break out of the bottom. Today we awake to find the futures smartly ahead and spanking anyone who shorted last night. Eat those worms baby ...

I've maintained for the better part of this violent set of moves that we have two sides who know they are right. When folks know they are right they act out more emotionally than they otherwise would. We've seen that as we are on day 10 of our strangle watch. We are near the end.

We have economic news shortly that could shift the sands yet again both before and after the bell. The pivot point of this rectangle is 1150 SPX and that's where the futures lie to start this day. At this point, we have to continue to maintain our stance of leaning long with individual stocks and hedging as needed with the futures. We are late in the rectangle and a break out of either side likely causes quite a spike when it comes. Watch the edges.

There are enough pundits about to make you think that this one or that really knows what is going to happen. The future is the future ... none of us can accurately predict the future over time. What we can do is evaluate the relative risk and reward when we take a position and stick to the plan associated with each and every trade. Unless we are a total bozo, we will be right as much as wrong and if we are any good, we will be right more than wrong. There are times it feels that we are wrong all the time just as there are time when we fell as if we are right all the time. Everything is cyclical in nature.

What some of us are better at than others is simply waiting. It's not easy to wait as there is always the itch to be do something productive. I honestly can't see turning to a short on this market at this juncture. I don't believe in the scenario at this juncture. As a result, I've been frustrated by my stance of keeping a few good charts on the books. The frustration is that the general market is making a mess of good charts while I wait.

So, in the meantime and on a different time frame, we trade some leveraged vehicles to allow us to book some change while we wait. When things are great we are booking short term and long term gains. When they are not so good, we are running in place. This year I feel as if I have done enough running in place. In fact, I can't remember a time where I've ran in place quite this long.
Today the market attempted to put together a little rally to begin with after the gap down opening. The selling pressure was too strong though and we ended up stair-casing down most of the day. Unfortunately, volume was a bit stronger yesterday and although not heavy, it's another day where down volume exceeds up. The Russell 2000 also broke down to new lows today and the other indexes are staring at the same possibility. All in all, it's precarious.
After hours MSFT put the scare in folks and the futures sold down rather rapidly. Once the true situation was known, things bounced back. Make no mistake though, good news is bad news and bad news is worse news right now. There will come a time when that changes but until it does, it sure makes for a miserable play pen.

Tomorrow morning we have 3 eco reports before the bell and then a couple more afterwards so we are likely to see more churn. It's also the end of month and there are sell signals all over the place. Personally I remain heavily in cash but 75% cash doesn't even feel like enough with this market. If we continue down tomorrow I'm sure I'll be more in cash because some stops are getting close again. So goes it. At some point we will get it right and the money will be made. We just need to make sure we get to that point without a large hole being dug and capital depleted. Consider that over supper tonight. See you tomorrow.

I'm still waiting and have forgone any activity as I wait. I still believe that this rectangle likely breaks north but I'm not going to make any outrageous bets until the picture is more clear. For now I stay about 25% invested on the long side in favorable charts. The biggest concern continues to be the small caps and until they right there ship there's not going to be a lot we can do on the long side. Same with the financials.

It continues to be NDX over SPX in terms of relative strength today as Internets and chips hang in there.

The market has that feel about it this morning that it wants to work higher, not lower. Primarily I feel that way due to the low volume selling that took place initially. I would want to primarily work from the long side today.

Yesterday was the first day in quite a while where we had a lift in the averages and volume actually increased. Looking at that volume intraday, it was mostly centered on buy spikes which is an encouraging sign. The problem with reading volume spikes though is that it could be 90% short covering so you have to keep that in mind.

Thrashing type volatility has markedly increased as 7 out of the 8 days of this rectangular pattern have seen the SPX trade greater than 10 points on a given day or roughly one or more percent per day. Of those days, the last 7 have seen alternating up/down days. That's indecision and that's what such a pattern is all about. I re-emphasize that the conclusion will likely have some punch to it when it comes.

Yesterday the SPX regained the 200 day MA and the financials were strong. Today we have the GDP number shortly and the estimates are centered around 3.5% although this market seems to already have discounted something worse. So, if it prints in that range, it's likely bullish. If it prints lower than 3% it likely gets a knee jerk lower at the least. If it prints higher, we also likely go lower as it stokes inflation fears and bonds will see down hard.

Tomorrow there are a slew of reports also and then there's month end juggling that takes place as well. We need to keep and open mind and continue to be patient until we get that right pitch. Then we need to make the home run swing. It's frustrating to wait this thing out like this, but cash is king during thrash and thrash is pretty much all we have had of late.

Although I would like to be a bit longer still in indvidual stocks, the stocks that remain in the portfolio have yet to violate critical support areas and are strong (with the exception of a couple). These are the stocks that I will look to add to once we do get a break higher that looks to stick. There are others on my watchlist but that list continues to narrow.

As I have explained elsewhere, the desire is to use the leveraged e-mini trades to trade intraday while we allow swing positions to truly be swing positions. In that past I have had difficultly keeping positions over extended periods of time as a result of the market being so fickle. I have changed over time to incorporate a strategy of trading in different time frames.
There are times when a particular strategy doesn't work very well. Holding stocks long while the general market moves against you is not the ideal way to profit. The primary goal should always be to preserve your capital. That means that in some cases you have forgo to possibility of gains in order to avoid potential losses. For example, while we are in this rectangular pattern on the indexes, it doesn't make sense to load up and bet that this is the turn. It may be, but we are likely to be far better off to stay highly liquid and to put the money to work when a more clear picture has come into focus. I, like you, am itching to put my capital to work, but if I dig a hole here then it becomes that much more difficult to get back to even let alone to make money. Capital preservation should be at the top of your trading list rules.

This afternoon we get some earnings reports in tech land and tomorrow we get a GDP number that could jolt the market. There is so much negativity and we are getting late in this technical formation that it is likely to push us out of the pattern, one way or the either. I'm thinking the upside still, and unfortunately, I think that without the complete washout that looked possible again today, it's likely to limit the range of the move higher. That's something we can deal with later. For now, we leave the day about 22% long and the rest in cash.

So far the market is keeping with it's recent trend of up, then down, then up again, etc. As we approach the last couple hours, the bias today has turned up but resistance is just overhead. I do not plan to add stocks until we get a breakout of this rectangle as I talked about on Monday, but in between we can continue to work index trades as we have today.

Last couple of trading hours are upon us and I'm watching for a lower high that sticks. The NASDAQ is the most vulnerable and that's where I'll play ball if we play. I expect another attempt to push higher but I can't see us breaking out today. Maybe they are setting the deck for tomorrows GDP number?

Despite the green on the boards, the internals are still negative today and though they have improved, that says a lot about who is driving the market. It's the big players using the programs mainly and they are the ones who keep giving us that chop. These internals are keeping my bias as sideways at best, maybe lower still today.

The market got the reason to bounce this morning off the oil inventory numbers but we have a really weak market here and the struggle is great. I'm not seeing any significant lift although the financials are attempting to find their footing on the rally in bonds. That's something to keep an eye on along with the techs and small caps. This continues to be a time to be careful as the chop can really get to you and the bottom of the rectangle continues to beckon.

The early support area held on the SPX. If that low fails, the 1136 low is next and then an acceleration downward is possible. If not, well then they run them again I suspect. Touch and go here.

On day 7, the chop continued and day 8 promises to be more of the same. SPX hanging by a thread here as the 1155 area is likely resistance today. That reversal yesterday is not a good sign for today especially coming on day 7 in my opinion. That sets us up for a decent chance of the break to the downside possibility and has me thinking more defensively again this morning. Man I wish I had those short positions in place coming into today ... but I don't.

I always look for a tell for direction. Watch the Russell 2K today. If it trades below 585 for any reasonable length of time and cannot break back above it, we probably trade to the lower end of the rectangle on the other indexes and the likelihood of a break lower increases.

Not to make excuses, but we really had exactly the trade we wanted this morning being short the SPX. Problem was, like yesterday, we put it on a bit early then we had the GLOBEX outage which really through a wrench into things. The upside is that we are even on the week. The downside is we are heading into mid-week now and our scenario outlined to start this week is that we wanted to short early week, not late.

We have whittled down the long portfolio a bit to protect ourselves yesterday and via stops today and remain mostly in cash but with day 7 passing on our rectangle strangle, we know that we are likely to see a move one way or the other by end-of-week and time is growing short. So, now we have to shift more to the mentality of working index trades until we get a range breakage.

Also note, they were not able to hold the 200 day MA going into the bell and in fact have sold down further after the bell. Tomorrow we have durable goods numbers before the bell and then the big GDP number before the bell on Thursday. Which way would you lean before the GDP number? That's likely to be what tomorrow is all about now.

I'm heading out to the garden ... more weeds to punish before the day is done.

Nasdaq printing new lows and S&P is staring at them. Trading today short into resistance was the rigth idea as once again we fail there. Problem is, every time they play with that level they eat away at more resistance. On the flip side, every time it holds it discourages others to hold at that level rather than to sell out. Looking for more tug-of-war into the close. Days 7 of the rectangle strangle and neither side has blinked yet.

Back at resistance in the SPX as the NASDAQ drags us higher. Chip and biotech strength is fueling those gains and although the internals remain negative and volume low, the housing numbers have given pause to the slowdown thoughts. The problem is that we are in a quandry with inflation fears on one hand and slowdown on the other. They don't logically fit together and both are not particularly good for the market. On the flip side, there's still the situation where this market has been sold down for quite a while and if they can break them through resistance they are likely to trigger a lot of stops short term. Getting dicey again. Let's see how stiff the resistance is on this latest try.

I'm seeing some early signs of a bid and am holding off to do anything. The questions today is do we short into that resistance area once more. That's getting more tricky but I think we still have to think seriously about doing so. Maybe just with the SPY or QQQQ. For now, let the first half hour to an hour play out and see if the strength continues to show.

My belief is that we are likely near the end of this decline although the quality of the rally that will ensue is still in question. In that vein, it's still possible that we get the flush move to the bottom end of the rectangle and even a nominal new low to scare out anyone left holding on by their finger tips. Consider why that flush would like be the scare flush. You have had decline after decline; whipping after whipping after whipping. Each time the early bird buyers come in only to get spanked for trying. Each time you decline you get a few more give ups; people who would otherwise sell into the lift if it were to happen. When you finally get far enough and the decline lasts long enough you get to the point where you are stretched enough that the new sellers can't find good risk/reward; the early birds refuse to get sucked in anymore and no longer are fuel to the downside as they flip quickly to manage losses; the weak holders who would be sellers into strength instead are sellers into weakness as they give up. It is at that time when one finds the table set and it's at that time where one should eat and feast. That's when you get a move higher that can actually sustain.

It may turn out to be nothing more than an intermediate term bear market rally. It my turn out to be something more. The point is that it is likely to come ... more likely than a continued decline of significant size from here. That's the thesis we are currently running with. This week is the time.

I've moved to a reasonably flat stance end-of-day as a result of the push towards the top part of the rectangle (SPX-wise). I was able to book some gains today working shorts on the SPY. Otherwise we made little progress. This week we have the next wave of earnings and some economic reports, mainly the GDP number later this week. Tomorrow is day 7 on our rectangle strangle countdown. Today we followed the strategy shorting strength primarily on the SPX. I shifted to the NDX for the overnight as well. I would like to see weakness tomorrow give us a shot at the bottom end of the range once more to see if it holds or, better yet, gives us a nominal break that fails to gather additional selling. Our bets are in place ... now we await the cards.

It's that time of the day. Traders are back from lunch and it's that time of the day where they likely will try to break higher. I'm not planning to short more (already put on a hedge) unless we get a failure and some likely momentum lower. If the break higher fails, we could get another volatile session to end the day once more. Internals remain very positive so far though and I'm not sure if they are ready to give back anything of significance today. We will see.

Today has the technical look of the opening surge and then the long drift until late afternoon whereupon the attempt to retest the highs takes place. The intraday range trade is between 116.30 and 116.00 SPY. Until we get something worth trading, I continue to examine other charts and keep my watchlist of buys fresh for when the time comes.

So we get a light volume push into the heart of resistance at 1162 on the SPX; not a good sign for a breakthrough. We do have good internals though and the positive spin is that we are starting to eat away at resistance.

I plan to stay hedged for now and to simply trading around the edges on intraday trades. My take is that it is going to be difficult to push through resistance at this point and that there still is fear out there about going lower.

I've been bothered by the current thesis most of the week and as I've reflected on it this weekend and am beginning to believe it's likely wrong. What has bothered me greatly is the volume story in the supposed head and shoulders pattern in the SPX. The reason I say that is that the volume on the left shoulder should be high; it wasn't. Furthermore, the volume on the head should be less than that of the left shoulder. Again not the case. This is not to mention that the supposed right shoulder was very weak and didn't come close to the level it should have attained.

So, if we probably don't have a H&S top, then what do we have? Looking at these charts it seems to be either a regular type correction in a long running bullish formation or the beginning of an intermediate to long term downtrend. Without the aid of a reversal pattern like the H&S top we simply have to keep an open mind about the intermediate term direction and look to other clues as they come about to what this may be.
In the shorter time frame, we still have a deeply oversold market. This is true of both my 10 and my 30 day oscillators. Next on my mind is time. Again, I refer you to the previous sell offs that I've published before. In each of these three charts of recent large sell offs in the market, the reversal occurred between 7 to 11 days. In one of those three cases we spiked lower on day 6 and then reversed higher out of the rectangular area on day 11. On the other two occasions we held the rectangular area and broke higher on day 11 and day 7 respectively. Today we start day 6 in the rectangle. That suggests that it is rather likely that sometime this week we are likely to see a break out of this rectangle. Given how oversold the market is, if we head down, it's likely to be like the one case cited above and is likely not to carry down more than 10 to 15 SPX points or to the 1120 to 1125 SPX area.

Soemthing else to look for in any move, up or down, is that of speed. If we break to the downside, it's likely to be a fast move of which the majority of the move is most likely over within a day or two (unless exogenous events are driving it). If we break higher out of the rectangle, it's likely to take an extra day or two in order to really get moving (typical in cases where the break down has been severe). Given this, we can look to wait until we break higher out of the rectangle and hold into end of day before establishing significant long positions. On the short side, we should look to ride it out if we break lower with quick leveraged short trades at most.

Scenarios

Another advance to the 1162 area before the 1140 area - We saw the 200 day and the first look at 1160 propel us lower this past week. My guess is the first real look at 1162 or what would really be the second test of this area will likely be repelled again. Whether it's enough to get another push to bottom of the rectangle or even break it, I do not know. It does carry good risk/reward to short the next shot at that area though; especially early week.

A return to the 1140 area before the advance to 1162 area - If we continue down to the bottom of the rectangle before retesting the top that's a hard case to do much constructive. I am positioned about 30% long and do not wish to relinquish most of these longs. The next two levels of support are the 1128 area and then 1115. The only plan that makes sense in this situation is to incrementally build a short position around the levels we went out at on Friday knowing full well that we will add more heavily into the 1162 area if we do rise on the assumption that the second test fails. Another option is to stand pat and simply ride it out because we know from our oscillators that this market likely will not fall substantially from these levels (more the 3%).
On the NDX, the 1464 area is equivalent to the 1162 SPX area. Given that the NDX has show less relative strength, we likely should short the SPX if we short given it is much closer to resistance.

My Plan of Attack

Continue to hold most of the existing longs
Keep a watch list ready of longs to add
Use the SPX or the e-mini to spread short but only if we rise to resistance and only then if we do it Monday or Tuesday at the latest
Maintain a long bias and attempt to catch a ride with some leveraged vehicles, especially on a break above SPX 1164

That ended up being one wild ride to finish a wild week as they purged the weak hands once more. A raid on longs into the last couple hours of trading and then a frightful run right back up. After hours they have ran them even further taking the SPX back above its 50 day MA. Can't say that it was pretty but I can say this make me feel more confident that they are building a base here in this big rectangular pattern and that this continues to feel as if the desire is to break higher out of this rectangle when the break occurs.

I had another rough day in and up and down week. That surge at the end isn't reflected in most closing prices for most stocks as it was futures driven. The programs were active on this slow day and that old adage not to short a dull market proved true again.

If you pull up an intraday chart of four days on the SPX, you can see another little rectangle forming; the one we are currently trading in. Price is trapped between the low end which is the 200 day moving average on the daily chart right at 1154 and the resistance at 1160. Because resistance is thick all the way up to 1160-1163, a break in that direction will simply offer up more shorts I suspect. On the downside it looks pretty much the same with lots of support on the 4 day charts at 1152.

What it says to me is that you can buy/sell the range which is what I was alluding to earlier with range trading. This is in fact what the program boys are doing by my estimation ... because it's a slow day and they can!

What happens inside a rectangle on the charts? Conviction ... until it is broken, then explosion. What you are seeing play out today is the conviction part. There are those who are quite convinced that this market will be unable to break higher due to the resistance at the 1163-1163 area. That conviction leads them to press short positions and to lighten up on long ones. The lightening up is also done by bulls who are not certain and want to reduce risk. They will be rocket fuel should the market break higher as they will rush to cover.

On the other end and not nearly as resolute in their belief is the 1140 bulls. They believe that the market has put in it's lows and that this area will hold. They buy anything that comes back to that area and the short tends to cover all or partially in that area.

The longer a rectangle builds, the more conviction is established and thus the more violent the reaction when the rectangle breaks. Right now a break higher would cause subtantial discomfort as those market participants are already rather determined in their belief. If the lows hold for a week or so, then that side of the equation will also stiffen their belief.

What I see happening today is churn ... back and forth action as the market digest the move from yesterday. The fact that we are down 15 on the Nasdaq really doesn't mean anything to me as we were up +40 yesterday. In fact, giving back a third doesn't amount to a hill of beans. Now if we gave up 30 or 40 today then I would feel a bit differently. If we give up 20 or 30 over a few days, then that just strengthens the rectangle thought.

So, I see today as a positive, not a negative for the bullish camp so far. If these levels held today on this low volume, that would suggest to me that next week we will see more buying into that resistance area and more shorts being put out. That just makes the explosion louder when and if it happens.

Volume is much lighter this morning and the programs, which are centered in the indexes, are whipping us around. The underlying bias seems positive on the NYSE while the NASDAQ shows rather negative internals. The chips continue to catch a bid though and that makes my bias up ... not down.

Last night I was up late burning the midnight oil in preparation for today. There are times when the market gives one little rest and right now it's that way.

The current thesis centers around the idea that we would like make an attempted bottom around 1140 and then trade back up to retest that 1162 break down area. Last night the SPX closed at 1160. Resistance on the NDX looks to be around 1462 or so with us closing at 1447 last night. In essence, we are close to the resistance targets.

Also consider how this picture is unfolding on the SPX. It is taking the form of a large rectangle (from the 1138 area to the 1162 area) . Rectangles on charts suggest a battle, a battle where both sides are roughly equal in strength ... a stalemate if you will. Though not defined well as of yet, given that I expect the 1162 area to provide rather significant resistance and the 1938 area now to act as a reasonable source of strength, we could expect some up and down in this range for a few days. Eventually one side will win. If we break higher, then the current thesis will require modification. I'm not completely sold on that thesis as that right shoulder is rather droopy. The volume pattern also doesn't match what you would expect to see in this pattern as well.

Regardless, the charts suggest that we have played this long bounce hand about as far as one might expect near term and we are likely to have trouble pushing much farther north immediately. That sets up a reasonable chance to work some short trades into the mix. Given our long leanings in individual holdings, that means we need to consider a hedge again as well or to let go of our holdings. Since I do not believe we will get a meaningful drop near term I do not care to significantly reduce long holdings at this juncture.

That brings us to today. Resistance at 1162 SPX, 1465-1480 NDX. With the SPX so close to resistance, today's bias will likely be down on any early strength that may look to carry us higher.

There are the types of days you live for ... one where every ball you hit clears the fence. The scenario we laid out to start this week is being fulfilled at each opportunity and although we have had the timing down pat, it wasn't until today that we really caught the meat of the move. Remember, it was just yesterday that we position short thrice only to pull our short hedges too early and miss the big move that occurred as the day progressed. Say it ain't so ...

This process that we are churning through now is an attempted bottom. Just like the other bottoms that we have showed previously, they take a little while to play out. Whether the lows of yesterday prove to be the bottom of a tradeable turn or not, you clearly have to think they have a good opportunity to end up that way -- that is if you are looking at this market as we are.
As I comb through the day's statistics I can easily see reason for doubt in this bounce today. Volume was about even with yesterday the bears will say. "It's just an oversold bounce", other will echo. "We are entrenched in a deep downtrend of which this does nothing to solve" another will comment to all of which I say "Great! Perfect!"

What we want is doubt. What we want is volatility. Volatility occurs at key points of an advance or decline and especially at the turns. Let there be no doubt, we have larger tests just around the corner ... tomorrow most likely ... for this feeble advance. That simply offers opportunity. See you then!

We have blown through the 200 day MA and that's just another good sign. Volume, by my count is stronger than it has been each day this week but still lower than last Friday's blowoff move. That sounds about right and fits with the thesis of the neckline retrace.

I am putting in some orders to book some gains if we close at the highs of the day. Just a small trim at this juncture though.

Given the gains on the day so far, expect the 200 day to cap the action most likely. The Russell and NDX have had the relative outperformance today and they could carry a bit more as a result. The real setup is going into tomorrow and the possibility that the gains could be extended. If so, then that neckline issue comes to front and center with the SPX up around 1162 or so. That's another 10 points from current levels. There is no economic data to derail us tomorrow. The real question will be who has more fear, the bullish forces or those bearish. That's a kind of toss up question of which we really have no answer. The more important question is will we retest that neckline. That I suspect is yes whether it be tomorrow or next week.

Sorry for the lack of posts here this morning as I was heavily distracted. The thoughts are the same as earlier and I personally added a few more positions this morning. I do believe that Greenspan's Greenspeak brought us down after that burst higher off the bell. He's about through now and he's not said anything to kill the market and this latest burst higher seems to be the players trying to get in front of a strong finish.

So the emotions switched yesterday and the give up occurred. Today's soaring futures reminds me of the suicide squeeze in baseball where the runner gets knows she/he is going to make it to home. What can happen, the pitcher is likely to deliver the fast ball, the hitter is great at contact, it's pat. When it's pat, it's usually trouble.

Last night the bears had declared victory and probably had their celebratory champagne. Little did they know that the trap had been set. They awake this morning to see the futures far ahead. Same for the bulls. Those who had finally given up, now will have to likely chase to get back in. The chase and the cover are what fuels the move. Today could be that blow off move back higher. Again, look at the previous lows on major slides. Those big moves up were the trapped emotions of under invested bulls and squeezed bears. When they make the turn on you, they don't provide much of an opportunity to participate.

Today, if I'm right here, you will have little opportunity to get things much cheaper that they start them. I will likely continue to pick early if we get any kind of fade off this early surge.

The market ends the day making lower lows. I'm sure there is handwringing as a result; handwringing, fretting, and just plain old worry is what eventually results in a bottom. So much of trading is mental. I know that fundamentally it's supply and demand, but supply and demand is predicated upon how people feel about whether they want to buy and or sell. When a period of selling reaches a climax, it's usually because everyone who wanted to sell had already done so and that's usually because they have passed through the give up phase (handwringing, fretting, and just plain old worry). Judging when that has occurred is not easy and I am in no way suggesting that today marked the end. What I am saying is that we have already stretched this rubber band significantly.

Given that my trading perspective is to attempt to measure risk versus reward, it appears to me that the greater risk at this juncture is for low to be put in quickly at or near the current price range. That doesn't mean it has to happen, just that it's the more likely outcome. If you look at the three previous bottoms after a waterfall low, this too has the scent of a low. This time could be different, but that is unlikely.

Now, if it turns out that the bottom is 1100 or some other lower number, then clearly we are not going to hang around with significant exposure. We will cut our losses and look to play another day. Too early to cut and run though ... not when the market is performing according to script.

So they did break it lower intraday as the release of the Beige book has rekindled the CPI worries and now we are moving to retest the recent lows. So, here comes either the flush or the fake. Is it simply a washout of the weak holders or is there more extended pain due on the downside.

My take is the former and though I had hedged my longs, I removed that hedge too early today and am left watching my portfolio of long shrink in value. Too late to hedge here now. Now we watch/monitor/wait as we see what awaits.

I continue to believe that the retest is in the offing and so far the 200 day ma on the SPX is providing resistance. It is possible that the low is in and a retest will not occur. There is enough evidence that a bottom could be in. We have to respect that the odds favor a retest but given everything else, I suspect it to be short lived.

I've moved in and out of the market today working intraday trades and slowly adding to long positions. A retest would be the time to add seriously though; not right here.

They put a brave face on pre-opening but there are concerns that rising rates are still in the cards and that ugly word, stagflation, may in fact come back just as it showed up in the 70's.

I'm going to be looking at any shorting opportunities intraday with the leveraged vehicles.

Monday morning I talked at length about the current thesis, the fact that we were likely tracing out a bottom after last weeks blowoff lows and that we would most likely see a rising wedge with a retrace. The first two days are exhibiting exactly that type of characteristics. I believe that what we are seeing now is a low volume rising wedge that will likely fail at some point in the near future leading to a retest of the lows of Monday and likely a break of those lows. The break may be just barely or it could be a bit more but given all indications it will not be significantly lower before a real rally higher ensues.

Given this, we do not want to be adding significantly as prices rise here. In fact we should be trimming and is what we did a bit of yesterday. At the same time, there are some stocks that are worth adding starter positions in given that this is earnings season and the individual stock charts support the notion. Per my contractual obligations with www.traderslive.com (my picks show up real time there) I can no longer post individual stock picks here a priori, let it be clear that there are stocks to consider buys on here. I am picking at them.

If we are tracing out a bottom on the major indexes, continuing to search for these candidates and getting them on the radar screen should provide a nice pop when the retest occurs and we head up again. The reason I add starter positions now rather than wait is that they may simply continue up despite the general market and secondly, I've found over the years that if I simply watch them I tend to loose track of them and end up simply missing the move.

The initial reaction to the earnings news is rather strong. The 200 day MA on the SPX held as resistance into the close but they are eating it up afterwards. That leaves the 1060 area as the real test now and given the after hours pop we are about half way there. We still have the CPI in the morning that could throw some cold water on this move, but if we gap up and hold in the morning, then the 200 day won't end up being the turning point. Problem is, this market sure seems to be looking for a reason to retest.

So, we'll see what it looks like tomorrow. For now, I've began to hedge as this market moves higher as I expect some sort of retest down this week.

As we approach the last couple of hours, what will it be?

Personally I'm thinking they try to squeeze them higher and from a technical perspective that would be perfect. Volume is not high again and a squeeze here into more earnings reports and the CPI in the morning might setup a good short opportunity. So, I'm on standby for now and looking to either sell some SPY or QQQQ short into late strength if it occurs. If we get significant strength, then maybe the e-mini's. We need to be closer to serious resistance though to take on those with overnight exposure.

Until we get the retest on these averages I am quite leery to commit any serious capital to additional intermediate term trades. The fact that we may not get such a retest is possible but the unlikely scenario so until we get something more solid, I believe you have to keep picking at small trades or keep time frames short on any larger sized trades. I do like the possibility of a late day move higher today though.

We have a positive start to the day but the SPX has traded back towards the 200 day MA. Look for the players to fade that intraday and then test it again end of day.

One of the things you should be asking yourself here is, technically, "What it would take to turn this market around?" Looking at the charts, I believe that a close above 1163 would give us that signal. Anything short of that and there's still doubt.

I see the futures up big but we have a PPI number up in an hour or so thus some caution is warranted. Where's the risk on that number? They are forecasting .6% overall, .3% core. With that expectation it's going to take a big number to rock this market and if it comes it would be in the core. I'm not a eco forecaster but I would take the under on this one. Note, I will not be doing anything in front of it though.

Oil up early and is bouncing off the failure to take out $50. Likely just a bounce though. Too early to think of entering those stocks for an intermediate term trade still I suspect.

Watch the resistance areas and how the market acts for a failure as that will be the key to a retest.

The ideal setup over the next 3 to 4 trading days would be to see the market move up to the resistance areas we have identified and then reverse back down to test the lows. I would expect to potentially see a nominal new low intraday but a reverse higher and close higher than today's lows. That would provide the best signal to increase long exposure, i.e., we really have a shot at a decent tradeable rally. Something to look forward to.

To that end, today was a good start. Decent breadth, lower volume (making buyers untrusting and likely getting the shorts to lick their chops) etc. The classic bounce scenario. We will likely get an event outside market hours that triggers to test day I expect. We have earnings season upon us and we have economic reports outside normal trading hours.
My plan is to hedge my longs with some short exposure into resistance areas and then to lift that exposure back into the retest. I'm done for the day. Have a good evening and see you again tomorrow.

Today is the first day in a long time that we actually see some strength in the small caps. This sector was crushed the past week or so. It's way too early to think it's anything more than some short covering but it bears watching as the week progresses. This market has a lot of healing to do and the small caps have been bleeding as much or more than any other sector.

In general we do not see a rush to buy and can you blame folks after the recent beating. That's why those bottom bounces happen like they do ... lower volume bounce and then a retest. If the retest can hold, then there's a little more desire to bottom fish. That's pyschology showing up in the charts.

When they bounced off of that 1040 area and held, they got a pretty good squeeze to the upside going. That has faded a bit now but still holding ok. Volume is quite a bit lower than last week and is what I would expect as the fear is still out there and the buyers tepid. Internals are mixed. I would expect another squeeze later today or tomorrow to take us back to those resistance areas. On the SPX, the 200 day MA is around 1154. You would have to think as we get close to that area the selling should become more intense. On the NASDAQ, that gap just below 1950 would look inviting as well. Both are a ways up still and I doubt we'll see that today but that's the technical areas you have to expect the sellers to show up at. I would be working the long side for trades right here but keep your time frame short. We have to expect a retest of these lows before the week is out.

The early take is positive. I've made a couple purchases and am feeling better about this week showing an intermediate term low. We will likely get a retest of these lows somewhere later this week though and that's when we should consider our next set of adds.

Last week we suffered our worst percentage losses since that debacle back in June of 2004. Both then and now the culprit was the frustration of being unable to get anything going with respect to earning money for an extended period of time. The we pressed some earnings and got burned severely. Now we pressed on a technical picture where we tried to convince ourselves that we needed a right should on the SPX up around 1220 to fulfill the H&S pattern that we were using as our thesis. Our insistence on being right in both cases cost us.

So we screwed up. What do we do about it? You can't hide in a corner and cry. You can't throw up your hands in disgust. You simply have to pick up the pieces and start over. One way to do that is to try and look at the glass half full rather than half empty. On a relative performance, we are still much better off than the averages as they are fast approaching 7 to 8% down on the year.

So what is the technical picture now. Our thesis, as late as Friday, was for a head and shoulders top to form on the S&P 500. The neckline was around the 1160 area. Friday changed all of that. The thesis no longer holds water … or does it? Take a look at this chart of the SPX.

I went looking back over the past few years of trading looking for a period where the DJIA had suffered 4% to 5% losses in such a quick period (3 trading days this time). My question was what happens the following few trading days after suffering such rapid declines. In each of the cases I found that prices stabilized and actually bounced rather vociferously. Look at the first week of trading in August of last year and before that early May of the same year. Before those there was March of 2003 where we saw the same situation. Note that in all these cases, a bounce ensued but the trading featured a lot of up and back; lots of volatility. Also note, in each of the above cases we had the same volume expansion as we saw this past week. March of 2003 saw a huge spike to almost 2 billion shares while May was almost identical. The August plunge saw increased relative volume but not extreme. Friday traded almost 2.2 billion shares.

Combine the above with sentiment surveys’ showing a high level of bears and fewer and fewer bulls and finally with the 10 and 30 day high/low oscillators reaching maximum oversold levels and last week suggests we are probably seeing the end of a decline not a new leg down.
So, the short term thesis is that we are likely to see a lot of volatility, a stabilization of prices around some low near term and the setup for a rather serious bounce over the coming 2 to 3 weeks. That low is likely around this 1140 SPX number although we could trade as low as the 1120-1130 area on this leg.

The intermediate term thesis centers on the now broken neckline. Although the pattern isn’t text book, I believe we have to respect it until the thesis is invalidated. If valid, that neckline break suggests an eventual trade back towards the 1100 area. Yes, it’s possible that we dive straight there but highly unlikely. More likely is that we stabilize and then retest the break point around 1160. It took 4 to 5 months to form the H&S top, so expect the 1100 area to be reached in roughly the same period of time. That would put us into the late August early September time frame. How cozy.

ACe Talking: Don't Panic!

I note the beating taken by the editor this week, and I have also been hurt by some poor trading and i

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