Wednesday, June 24, 2009

Still Waiting for A Good Set-Up One Way or the Other

I was hoping to get an ideal set-up this afternoon for an inverse ETF play, and the short-term model came close to overbought on the Nasdaq, but the post FOMC decline pretty much wiped out the chance of getting overbought.

I really don't have a great idea of what will happen tomorrow. I tend to favor the day following the announcement to move opposite the post announcement reaction. That would suggest an up day tomorrow, or at least in the morning. Supportive of that idea, the Dow moved beneath Tueday's low today, but none of the other major indexes did. So this may be a short-term non-confirmation, indicative of more strength in the broad market. That move on the Dow set-up a decent looking potential bullish divergence on the technical indicators as well.

On the other hand, my experience tells me not expect a major rebound until the first support is broken (this being more true if the March-June rally proves to be a bear market rally). Since my perspective is that the market is now in a correction/leg down, and the very early stage at that, I think it is wise to require that the support be broken before taking any bullish trade.

When a major "pattern" completes in a market, there is usually a sustained thrust in the new direction that often entices those now accustomed to buying (or selling) small corrections against the prior trend to buy. The problem is that early (or about halfway through) in the thrust there may be a brief pause, even with a nice reversal bar, that is like Mr. Market Angler throwing the bait. Then the potential reversal fails in a dramatic way, and the hook is set. While that remains to be seen in this case, my suspiscion is that we may just be seeing bait right now.

One concept I have discussed several times on the blog, especially in the last 1 or 2 months, is that of a "measured correction." In a trend, any corrections against the larger trend will tend to be roughly similar in price and time on average. An early sign of a larger change in trend, is when a correction is larger in percent, and takes longer than the largest correction so far in the trend. As it stands now, the largest correction in the S&P before this one was 6.5% and took 5 days from high to low. The current correction has gone about 7% and is 8 days from high to low so far. So we have already seen a bigger and more time consuming correction, though only marginally. That is why I think the current level may be a "bait" area.

Bottom line - don't be surprised to see another quick and sizeable move down from here that undercuts major support at 878 on the S&P. If that move down doesn't start tomorrow, then there may a great opportunity for an inverse trade on further strength tomorrow.


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