Euphoria May Finally Wear Off

The market is still experiencing some morning-after warm and fuzzies after the Fed announced more than a trillion dollars in Treasury and mortgage-backed securities purchases. This is the government's second coordinated effort with the banks to lower the long end of the yield curve. The result was to drop the 30-year mortgage down to 4 5/8 by 4:00pm MT yesterday. The first time the government targeted the long end of the yield curve back in November it had the exact same effect. The mortgage rates dropped until January, and then the 30-year had a quick, sharp drop to 4 5/8. The banks dangled the low rate for part of one day, sucked some more people in at 4 3/4 and 4 7/8, left it at 4 7/8 for one more day, and then blasted out of their like, well.....like a bank heist.....

I expect more of the same. I speculate that 4 5/8 will carry through this morning for a bit and then be gone again.

Earnings news is getting mostly glossed over, (except the good news of course). ORCL beat earnings and guidance and is trading up sharply pre-market, which is giving the Naz a boost over the other indices early in the day. FDX (which is typically a good barometer for the economy and business) missed earnings and guidance, and is trading down early. NKE missed guidance and is also down early.

Finally, on the jobs front, Weekly Jobless Claims came in slightly better than expected. So the glass is definitely full enough for traders to make one more morning-after push to pump up stocks towards the highs of yesterday, and perhaps even a little beyond.

Here is a chart of the SPX:
(click on image to enlarge)

You can see that the SPX (market) ran right to the top end of the resistance zone I drew for you several before the open yesterday. That was further than I thought, but then again, a positive news surprise is not always easy to guess before it happens. Trading means staying on your toes at the key catalyst times (like the FOMC Meeting yesterday), even when you think it will be a non-event. You don't always know if a governmet agency or politician will surprise you (negatively or positively) until it happens. In this case, targeting the long end of the yield curve is the right thing to do, I just wish that it wasn't part of a manipulative govermnent/bank effort that gets yanked right back away after sucking in the wrong (or right I suppose if you're a bank) clients.

I speculate that the market may try to push just a little more this morning, but eventually even huge swings that are contrived through massive coordinated government and bank manipulation do come to an end.....

A drop through 780 on the SPX would be the first warning that the upswing is probably over. Remember again, as I have stated over and over the past several days, don't get too carried away trying to play puts on the consolidation, traders are very much a-flutter over stocks right now.....So any consolidation will probably be somewhat shortened not last more than a couple of days.

I'm going to take a moment to answer Eric's questions about trying to deal with an extreme move (or short move) right here, since it's relevant to all:

The market (and price swings) don't always go exactly where you think they will go. For much of 2008 and 2009 the price swings would go shorter than expected (hence the switch to short-swing trading). But occasionally (and especially since September) the swings have gone longer than expected (usually because of news or news manipulation). Either way, you can only speculate on the future, you only see the beginnings and ends of swings after the fact. So as a speculator, I don't know when the current upswing will end, and I read as closely as I can whether or not I think it will end quickly, or if it will put up a fight. With the current upswing, I warned over and over that it was going to put up a fight (be fussy). I also have been warning that there is a "mood change" with traders (the stock market was guilty until proven innocent, and now - thanks to the news manipulation - traders view the market as innocent until proven guilty). So don't get too jiggy about cherry picking puts at what you think is the top of the swing.

I have thrown several small puts at what I thought was the end of the upswing as "feelers" the past several days. But I kept it small, and scaled out as I went. I also kept the stops tight. As a result, I have not lost any money on puts this week (in aggregate). I have also missed a few call opportunities, although I could have done a short swing call a couple of times if I had the opportunity. But that's how it goes, identify the conditions and go with it, and realize that price action often doesn't do exactly what you think it will. I call a lot of swings pretty closely, but I also miss some, usually because news is such an unknown, even for me, even though I am actually able to guess some of the news bogeys before they happen. One of the keys to trading is always adapting to current market conditions, and on this swing I adapted, which is why I didn't lose any money on puts even when I thought it might be rolling over. I always view the market as a probability and never as an absolute.

7:48 am MT: Intra-day Update: Ironically, after the above post, it looks like the market upswing is finally running out of gas.....and of course, I view that as a probability and not an absolute.....

7:52 am MT: Intra-day Update: The market had every chance to reach a little more this morning based on the news "euphoria." I speculated pre-market on a little push (and I was thinking along the lines of hitting the high of yesterday). Well, the push has happened, and the market (SPX) went right to yesterday's high and is starting to wiggle a bit. It's still possible that it punches through, but I won't be surprised if the upswing is done now, and the market doesn't push through the two-day highs.

Price action is loosening up on the intra-day charts, which is another indication that the upswing is getting to a "relative" area of completion. And of course, I'm not loading up on any puts yet, I'm just watching what I think is the end of a very long swing.

It may be that there are some put opportunities a little later if the price action starts loosening up even more intra-day.

10:22 am MT: Intra-day Update: The 60m chart trend is continuing to loosen up. I think the SPX is headed towards 774, which would breach the first warning area of 780. However, we may still see a bit of fighting and upthrusting as the Fundies throw more money at the extreme areas of this upswing. A change in the trend of the 60m charts is probably the best guide for the end (or continuation) of the upswing. I've been following the 30m - 60m trend for several days now, and it hasn't changed or misled me. So it's the single best clue for price action today.

Here is the current 60m chart of the SPX with the short term moving averages:
(click on image to enlarge)

We'll see what happens next.....

12:25 pm MT: Intra-day Update: This is the last battle area for the market to hold if it's going to bounce back to the highs of the day. If the SPX drops below 785 then I speculate it will keep on going down to 776, which would be the next signal that the 60m trend may be drawing to a conclusion.