9/27/2010 8:43:27 AM
Pulling one out of the hat...
The bulls escaped the bear attack and turned the tables on them on relatively light volume...
Recommendation:
Take no action.
Daily Trend Indications:
- Positions indicated as Green are Long positions and those indicated as Red are short positions.
- The State of the Market is used to determine how you should trade. A trending market can ignore support and resistance levels and maintain its direction longer than most traders think it will.
- The BIAS is used to determine how aggressive or defensive you should be with a position. If the BIAS is Bullish but the market is in a Trading state, you might enter a short trade to take advantage of a reversal off of resistance. The BIAS tells you to exit that trade on "weaker" signals than you might otherwise trade on as the market is predisposed to move in the direction of BIAS.
- At Risk is generally neutral represented by "-". When it is "Bullish" or "Bearish" it warns of a potential change in the BIAS.
- The Moving Averages are noted as they are important signposts used by the Chartists community in determining the relative health of the markets.
Current ETF positions are:
Short DIA at $108.57
Short QQQQ at $49.66
Short SPY at $114.82
We are long Oct $106 DIA puts at $185 per contract ($1.85 per share) on Friday, Sept 17th.
We are long Oct $48 QQQQ puts at $94 per contract ($0.94 per share) on Friday, Sept 17th.
We are long Oct $113 SPY puts at $231 per contract ($2.31 per share) on Friday, Sept 17th.
Daily Trading Action
The major index ETFs opened significantly higher and rocketed higher for the next hour. The rest of the morning was spent moving sideways with a gradual rise the rest of the afternoon to see the major indexes rise 1.8 to 2.1% and close at/near their highs. The Russell-2000 (IWM 66.99 +2.11) gained a whopping 4.3% while the Semiconductor Index (SOX 346.14 +13.31) rose 4.0%! The Bank Index (KBE 23.27 +0.64) gained 2.8% and the Regional Bank Index (KRE 22.79 +0.75) gained 3.4%. The Semiconductors and Bank Indexes remain below their 200-DMAs and in trading states. The 20+ Yr Bonds (TLT 103.50 +1.41) lost more than one percent and fell back below its 20-Day Moving Average (DMA). NYSE volume increased modestly but was still average with 1.067B shares traded. NASDAQ volume also increased slightly but was still average with 2.014BB shares traded.
There were three economic reports of interest released:
- Durable Goods Orders (Aug) fell -1.3% versus an expected -1.4% fall
- Durable Orders excluding transportation (Aug) rose +2.0% versus an expected +0.6%
- New Home Sales (Aug) came in at 288K versus an expected 291K
The first two reports were released an hour before the open while the latter report was released a half hour into the session.
While many commentators will assign reasons for the large move to the upside, we can shorten the list to the following:
- Overseas markets were trading higher
- Fed Chairman Ben Bernanke made comments that provided confidence
- The Durable Goods reports were better than expected
- Short Covering boosted stocks
The reality is probably a combination of all those things but the most important was that stocks were balanced on a knife's edge from a technical standpoint. The bulls had the advantage in the morning due to exogenous factors and they never relinquished that momentum. The first hour of buying was on better than average volume as was the final half hour. The rest of the day was incredibly light and the overall volume wasn't impressive. A meaningful rally would have more volume although there is no arguing that this was a an impressive one day rally.
All ten economic sectors in the S&P-500 moved higher led by Industrials (+2.8%) and Financials (-2.8%).
Implied volatility for the S&P-500 (VIX 21.71 -2.16) fell a whopping nine percent closing significantly below its 200-DMA while implied volatility for the NASDAQ-100 (VXN 22.72 -1.54) opened at its 200-DMA and moved down more than six percent.
The yield for the 10-year note rose two basis points to close at 2.61. The price of the near term futures contract for a barrel of crude oil rose $1.31 to close at $76.49.
Market internals were positive with advancers leading decliners 9:2 on the NYSE and by 4:1 on the NASDAQ. Up volume led down volume 9:1 on the NYSE and by 7:1 on the NASDAQ. The index put/call ratio fell 0.18 to close at 1.34. The equity put/call ratio fell 0.07 to close at 0.57.
Commentary:
Friday's trading saw the bulls deliver when they had to. Both the S&P-500 and Russell-2000 had given up their uptrend states and the NASDAQ-100 and Dow were on the verge of also moving into trading states. Recall that a trading state suggests that the security will reverse at resistance or support levels as opposed to continue on through them. The NASDAQ-100 had already broken up through overhead resistance as had the Dow. Both had pulled back with the rest of the major indexes on Thursday but both soared to new recent highs on Friday. The S&P-500 closed even with its intraday high last Tuesday so is poised to break out or reverse here. The Russell-2000 is in a similar situation. The long-term bond ETF (TLT) is still in an uptrend state which tends to work against equities.
We entered short positions for the major indexes at the close so we are now positioned short but with neither losses nor gains (yet). With every article we read about the market showing outright bullishness, we are happy to be short, just because the consensus, when it is overwhelming, tends to be wrong. We aren't overly optimistic about our position as equities could continue to rally here in which case we will be quick to abandon our position. However, for all the bullishness, there is still heavy overhead resistance not far overhead and the bullish beachhead isn't really fully established just yet. This is relatively easy for us to watch what happens because of our excellent entry to short positions.
