Reality Sets In Part Deux

Pre-market futures are down sharply, and the DIA chart I posted on the market wrap last night is set to gap down near the bottom of the channel. Yesterday, early in the day, I had a logical target at the bottom side of the gap on the SPY around 81.00, but illogical traders who wanted to "hang around" for AA's earnings, bounced the market back. Today we may see that test of 81.00 because of a news bogey that hit this morning.

George Soros is the bogarter today, and I'm still chewing on whether I believe this is all a coincidence or more manipulation. Remember, the rally started with C, JPM, and BAC giving "positive" outlooks along with a government news bogey on easing mark-to-market accounting rules sandwiched in between. Then the Fed picked up the news bogey train and pushed it even further with their announcement to buy $750b more mortgage-backed securities, which started the mini refi surge (which was designed to mimick what happened in January, which is what gave the banks a "good" January/February, which was the "good news" that C, JPM, and BAC announced that started the whole rally in the first place). Then the government jumped back in and pulled the news bogey train even further with series of smaller hints and announcements before throwing down the big G-20 Summit news bogeys that capped off the market rally (the market has not made new highs since the G-20 news bogeys pushed the train the last stages up the hill).

All of a sudden, along comes George Soros this morning stating that the "monthlong rally in equities won't last." "It's a bear-market rally because we have not yet turned the economy around." "This isn't a financial crisis like all the other financial crises that we have experienced in our lifetime." Now, I think he's correct, but the timing of the news is fascinating to me, especially in light of the fact that numerous other fund managers and analysts have stated the exact same thing the past two weeks.

The Googly-Eyes, Top Guns, and even more experienced fund managers appear to have been buying the rally all the way through, pushing the sharpest move on the market since 1938. If George Soros is the magical person that ends the rally when no one else could it will only add to my "fascination" over what's happening in the financial markets. From all appearances, it looked like a coordinated, designed series of news to start the rally, then more coordinated, designed news to sustain the rally, then more coordinated, designed news to push the rally to it's peak, which was the sharpest rally in the market since 1938, which allowed the media to run a bunch of positive headlines, and now, we get the news from George Soros that the rally is over.....

On to the show. The SPY is on it's way to 81.00, and a nice consolidation channel is imploding after the comments by Mr. Soros this morning. Banks are leading the way down (imagine that), and AA, MOS, and the commodity and energy stocks are right behind.....All of a sudden everyone is worried about earnings.....

I'm not all that interested in loading up on puts today just because it's counter-trend, but there may be a couple of small put opportunities throughout the day. I wonder if the market won't be "strategically" buying all the dips just beyond all the key technical points like it has the past several weeks. I think that the news by Mr. Soros is a hint that strategic buying of dips may be over for now. Whatever happens in the next few weeks, earnings season will probably be the key catalyst, so the market continues to posture and position ahead of AA and MOS. Yesterday they hung around, today, the warning from Mr. Soros may keep certain traders from hanging around as much. Like I said, this is all "fascinating" to watch.

8:00 am MT: The SPY (market) is making its first counter move on the 5m charts. It looks like a Bear Flag type of consolidation, perhaps a gap test back to the 82.00 - 82.25 area. This is the first put buying opportunity for a short-swing if you didn't pick up a put right out of the gate.

Again, there is no reason to get completely loaded up on puts (some fundies won't pick up on the Soros rollover memo), and there is no reason to cherry pick calls (there is a mini "seed change" in the market today, there will probably be less dip-buyers today than in the past several days). But a little put play today is probably ok.

The target on the puts should sync up with the 81.00 - 81.25 area on the SPY.

8:08 am MT: Here is a 5m chart of the SPY showing the second Bear Gap in two days:
(click on image to enlarge)

The drop dead area for a stop out on a put should be around the 82.50 area on the SPY (market). We'll see what happens next.....

8:14 am MT: The SPY is attempting another gap test, so this may be a second opportunity for a small put entry.

8:23 am MT: The SPY is still crunching around the gap. The 15m charts clear up the picture a little.

Here is a 15m chart of the SPY:
(click on image to enlarge)

You can see a bounce back to test the gap. The market is hanging around, but I speculate that it will fade stronger today than it did yesterday. Traders will probably still come back at points today as they position ahead of earnings, so I'm only in the mood for short swings, but I think the market will have a tougher time coming all the way back today like it did yesterday.

8:33 am MT: The market is making a push, it looks like the SPY will overshoot 82.50 by about .10 - .15 cents. I'm still watching to see if this surge will roll over in this area.

8:46 am MT: Traders are still trying to make a push, so the market looks headed higher, perhaps towards the 83.00 area. There's no sense in fighting with puts right now, I'm just standing back and watching the action for the time being.

8:53 am MT: There is an Advance Block forming on the SPY 15m charts. But again, I'm standing back until I actually see the price action confirm. Right now traders seem content to push the market up similar to what they did at the end of the day yesterday.

9:00 am MT: This is the first key rollover point of the morning. However, if the market blows off the Gravestone Doji on the SPY 15m charts and heads higher, then the Googley-Eyes are in charge, and once again, there's no reason to play any puts.

10:38 am MT: The market continues to crunch along. Market internals, specifically $UVOL-$DVOL continue to weaken. Net volume was down yesterday as well, but there was still a narrow-based, lower volume bullish price push by the Googly-Eyes into the close. So I'm not hyper excited about puts.....like I said this morning, there may be little opportunities here and there but nothing dramatic. The Dow is underperforming the SPX and the Naz, which means that traders who are more risk-averse seem to be controlling the selling, while more speculative market areas are seeing some buying. This goes right along with what I have been speculating, the Googly-Eyes and their fixation on momentum stocks is still a factor. In the end, it will be interesting to see which set of fund managers wins this game from the past couple of weeks.

11:09 am MT: This looks like the third fade attempt on the day by the Bears. Eventually, the market may cave in a bit down to new intra-day lows. Whatever the price action ends up doing, today is a bit of a throwaway day because everything resets tomorrow (either bullish or bearish) off the AA (and MOS) earnings.

I've been playing a small SPY put off the gap test rollover (up around the 82.30 - 82.50 area earlier this morning), but I'm not doing anything huge.

11:32 am MT: I sold about 1/3 of the put position at the 81.70 intra-day support level for about a 5% gain so far. I'm holding 2/3 of the position as the market punches to new intra-day lows, which I speculated would probably happen.

1:35 pm MT: I sold the rest of the puts as the market ground along the lows of the day. The total gains were about 5% for an intra-day trade.

I picked up another set of puts in case there is a late day fade, but the bulls and bears appear to be locked in more grinding and fussing.

2:00 pm MT: Market Wrap: Silly Googly-Eyes.....didn't they get the Soros memo? They probably still don't know what hit them today.....They had so many "positive" news bogeys the past three weeks that they got conditioned and complacent about buying every dip, wiggle, gyration, and things that looked like dips but were just hiccups. Even yesterday's Bear Gap couldn't daunt them. The professor was giving them cheese and they kept buying. If the market pulls back - buy, if the market wiggles - buy, if the market dips - buy.....buy, buy, buy until the SPX formed the steepest rally since 1938 on no real change in fundamentals. Then Boy George said sell.....and, and, and, but, but, but....I can hear them now, talking to the walls as they mutter the words "didn't we blow off all the fund manager's warnings and analyst's comments even just yesterday?!!" "We are always supposed to buy, it says so in the news bogey playbook from the past three weeks!".....And then a little raspy voice comes over the old Philco 90 and crackles, "silly goose, didn't you get the memo?"

I sold the second set of puts about 1-2 minutes before the close and picked up another 5% gain on an intra-day trade. I made the 10% I was shooting for on the day, I just had to do it over two trades. I wasn't looking for a huge day, but it was a nice gain.

2:42 pm MT: AA and MOS both missed on the bottom line. Both stocks are trading down a little after-hours, but there's still a long, long way to go until tomorrow. Both stocks will have to issue some clarity on their forward guidance, and then we'll see how traders react.

In addition, don't put too much stock in, well, those stocks. By that I mean, there are way too many fund managers that will want to focus on what they hope is good news from all the corporate earnings due next week. So even some bad news from AA and MOS may not be enough to take their eyes off the bottom of the glass, they will probably want to see more evidence (good or bad) next week. If the market sells off tomorrow because of AA and MOS, the furthest I would expect the SPX to go would be the 780 - 785 area, which is still a pretty big drop, but not enough to change the uptrend.....yet. I still speculate that traders will want to hang around in hopes that the majority of earnings will give the market a boost and keep the uptrend going.

3:23 pm MT: MOS must have issued poor forward guidance because the stock dumped a bit more after-hours, and is now trading down over 7%. AA keeps sliding off as well and is now down about 3%. Tomorrow is shaping up to be similar to today, which is a gap down, some buying, perhaps a mid day fade, and then probably some Googly-Eyes stepping in because they are still in the "buy the dip" mentality and hoping for good earnings next week. Just like today, though, the majority of fund managers may sell any later-day rallies, although if the overall market dump is pretty extreme then I won't be surprised if somebody still tries to "buy the dip" sometime in the last 30 minutes. Just like today, I will probably favor puts tomorrow.