Major U.S. indices closed down around 2% Monday, weighed down ongoing European debt problems and another embarrassing stalemate in Congress. The so-called supercommittee was charged with slashing the deficit as part of the deal to raise the debt ceiling, but could not reach a deal after three months of talks over taxes and spending.
Borrowing costs in Europe remain dangerously high, and the possibility of a France sovereign debt downgrade looms following downbeat comments from Moody�s.
The S&P 500 was able to close off the lows after four days of selling, but bulls did not do enough to change the momentum and complexion of this market. Support did hold today around the $119 area in the SPY today. With increasing rhetoric about the possibility of a global recession, policy makers may move more quickly to come up with decisive solutions. In a headline driven tape, beware of holding overnight shorts, because one major story can dramatically alter the trade.
CONNECTING THE DOTS
There are several moments to see when the October rally gave way to the recent sell-off. On October 27th we hit 1292, the upper end of the 1250-1300 target. That was a time to sell and take a step back, not to chase excitement.
We then had two distribution days on October 31 and November 1, and for the first time failed to hold the 25% retracement level. We did hold the 38.2% retracement, but in this fast-paced, back and forth market, we lost crucial momentum.
On November 9, bulls were blindsided by a heavy volume �day to take notice.� It was a big time brush back pitch to measure commitment and clean up some loose longs. The market never made it back to pivot highs after that.
On November 16, the wedge started to resolve to the downside. Technical trend traders got stopped out of the market at that point, and IBD put us back into �market correction.�
Right now it feels like major market participants are choosing to park their money on the sidelines, and this thin, news driven tape is hard to trade. The Washington circus has also started once again, and it�s hard to trust longs with these guys at the wheel.
The key words for traders right now are patience and discipline. Cash is a position. I talked about buying SPY for a trade from $118.75-119.50 in the live Morning Call Monday morning, so I am long some for a small trade. I think we will eventually test the 50-day moving average around 1205 at some point before Turkey Day.
*DISCLOSURES: Scott Redler is long SPY
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