Another Day Another Gap

If only the market would gap a little.....then we might finally see some whipsaws and volatility day to day.....

The Bulls are really grousing today, which is weird as usual because they got themselves too high off too little and now they appear to be getting themselves too low off too little. The banks stress test will require banks to raise more capital by converting preferred stock held by the TARP, I kid you not.....that's how it's being reported.....It's not owned by the government anymore, it's not even owned by the treasury, it's owned by the TARP.....Anyhoooooo, the TARP will probably convert preferred stock, which will raise capital at the banks but lowered the common share price, thus putting some pressure on financials this morning.

In addition to the stress test "bad news", ok.....wait.....sorry but I have to rant about the Bulls (Googly-Eye Bulls anyway) for a moment......I thought everything was amazing with the banks!?? Didn't the banks tell you for the past six weeks that everything was groovy and hunky dory and you just bought it without even blinking! Didn't Treasury Sectretary Geithner just tell you last Tuesday that the banks are flush with capital! And now all of a sudden they don't have enough capital, and you keep believing everything those folks tell you without even questioning for one tiny moment! Sheesh!

And now.....a quick rant about our political "leaders".....Didn't Treasury Sectretary Geithner just tell us last Tuesday that the banks are flush with capital! And now all of a sudden they don't have enough capital! Remember, last Tuesday started the current rally back to the highs of the extreme trend. Tuesday itself was a 20 point 2.5% move, and the SPX rallied another 20 points on top of that to reach the highs. Now all of a sudden last Tuesday is gone, puff, just like that, it's magic! So when I said Geithner was playing tit for tat with Jim Owens, CEO of CAT (remember the whole exchange between Owens and the president over job hiring earlier in the year, and remember Owens comments after earnings on Tuesday?), if any of you doubted me about the bold tit for tat comment......how about now? Last Tuesday, according to Geithner, the "vast majority of U.S. banks had more capital than needed." And now.....less than a week later??!

Oh, and by the way, there's a flu outbreak that has the commodities market roiled, which is putting some extra jitters in the stock market. Now there's a real issue to be dealt with. I hope some people get their priorities correct because this is about human life. I'm very grateful to all those who are hustling and working around the clock to try and stop the outbreak from turning into a pandemic.

The market, and many stocks are set to gap down and then run down to the bottom of the Rectangle patterns I pointed out last week. So that's that.

The SPX is about to give up about 1/3 of the Geithner-manufactured upswing in the gap down this morning. I speculate that the SPX will test the 850 area today or tomorrow, and a drop below the 850 area would open the door for a move to the 830 - 835 area.

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

Here is a chart of the Dow just after the open:
(click on image to enlarge)

The Dow is a little easier to read right now. I speculate the Dow is headed for a test of 7,950 - 7,970. A drop below those areas will open the door for a move to the bottom of the Rectangle in the 7,800 area. By the way, keep one eye on the highs of the day (the close of Friday), because a sharp move back above those areas means we probably just got bogarted again. Any stops on puts should be in those areas, and then trail down if the market runs down.

7:38 am MT: The SPY wiggled back into the gap a little. The SPY (market) will probably wiggle a little more and then roll down some more. If it tests the 86.00 area and then rolls down to new lows, then bring your put stops to just above the wiggle high in the 86.00 area. Keep trailing it down if the market keeps moving down.

7:42 am MT: The wiggle is done, this is where the market should make new lows intra-day. If it doesn't, keep an eye on 86.00, the SPY and the Googly-Eyes may try to push the market beyond that point and go test the 86.50 area.

7:46 am MT: The Bulls are trying one more push in the 86.00 to low 86's area. The key to this first wiggle in the 5m - 10m charts is a confirmed rollover. It still looks like a Bear Flag into the gap (it's easier to see on the 10m charts now), so I'm not bullish on the day. I'm really not bullish unless we get a news bogey, then I have to be bullish whether I like it or not.....and I'll know if we got bogarted if the SPY pops hard through 86.75 and heads towards 87.25.

7:53 am MT: The SPY is pushing beyond 86, so if the market doesn't confirm a rollover on the 10m charts between 86.25 - 86.50, and instead blasts towards 86.75, then this will be more of a rolling, grinding price action on the day with support in the 85.75 - 86.00 area and resistance in the 86.75 - 87.00 area (possibly as high as 87.25). I really don't want a grinder, so a rollover before 86.50 would be nice.....

8:00 am MT: Just an overall thought on the day, as the SPY gets ready to roll over. The wiggle back we just got was a little too strong for a market that looked like an easy sell-off intra-day. It tells me that there are still too many Googly-Eyes out there buying any dip they can get their hands on. So if you do puts on the intra-day rollover, then watch the 85.75 area as a potential support. The market has to prove it's downward momentum to me again after this sharp wiggle back. There is still a put possibility, especially if the rollover comes before 86.50, but don't take a huge position. Cherry pick a little.

Also, realize that drops to new lows are opportunities to sell part of your put positions, not buy a "breakout." I think breakout trading is off the table today. Take the swings and use breakouts to scale out a little in case the Googly-Eyes are in dippy mode (what they think is crafty buying of breaks to new lows just when breakout traders are shorting).

8:06 am MT: This is the best chance for a put right now. If this doesn't work right here, then it gets tougher as the day goes along.

The SPY is putting in a Bearish Engulfing on the 10m charts. This means that about 86.40 on the SPY is your drop dead area for puts. A move above that area and it means the Googly-Eyes have way too much control of the markets and puts get tougher throughout the day.

The Bearish Engulfing and rollover look good. Now it's a matter of whether or not the market can make new lows. If it can't, and the SPY confirms a bullish bounce on the 10m charts then take the small profits on the puts and walk, and look for the next good setup - if we get one.

I hung around here longer than I was expecting, but all the action was happening right now so I wanted to talk you through the setup.

I am conducting some tests of the new service this morning (hey, I should call it a "stress test", then maybe I can get some TARP money too), so I will be doing that for a few hours and checking in here from time to time during the day.

12:10 pm MT: The SPY (market) pushed back up towards 87.00 and turned into the Rolling Grind I warned of at 7:53 am. So far, support is the 85.75 area and resistance is the 86.75 - 87.00 area, just as speculated.

The price action looks like it will tail off and fade enough that today will finish as a down day, but some fund managers are still starstruck and buying every dip they see, not matter how technically lethal it looks.

Overall, the market continues to put in a consolidation pattern on the daily charts. But the consolidation is very loose, has a tremendous amount of gaps, and a lot of Crazy Tails, which are reaches to intra-day highs and lows day to day that create longer wicks on the candlesticks than would normally be there in a more rational market.

Here is a 60m chart of the SPY showing a current tipping point at 85.50:
(click on image to enlarge)

The SPY may fade through 85.50, which would open the door for a possible move to the 83.00 - 84.00 area. However, with traders in a moody, and perhaps irrational behavior right now, there's no sense in speculating on anything other than a small position if you are playing the fade. The market is temporarily trapped in a range on the intra-day charts (85.50 - 87.00), which is inside a range on the daily charts (83.00 - 87.00). So a confirmed bullish bounce on the 30m - 60m charts on 85.50 would probably lead to a move back up towards the 87.00 area.

This day turned into a Rolling Grinder about 8:15 am - 8:30 am MT this morning, and that was that. About 1/3 or the time there's not much there in a trading day, and today looks like one of those days.

I usually check out mentally from a day like this about 60m - 90m before the close so I'm not wasting my energy. Also, if I throw a few feeler trades at the market early, and end up with a couple of scratches, and then I see the price action go into goofy grinder mode, then same thing, I usually check out mentally and don't try to waste brainpower on irrational or random price behavior. I'll walk away and wait for clearer technical signals instead of trying to make something out of nothing. As a trader, I have to always show up, and I'll throw little feelers out on days that could turn into momentum days so I can build position as the momentum picks up, but if it all fizzles out, then I don't try to force things. I scratch the trades, walk away after some effort and no reward, and get myself ready for a new day. Keep these kind of days shorter so you have the energy and enthusiasm for when it really matters - the 1/3 of the time when you get a better trading day.