Bullish Blues
There is little to like about this market if you are a bull. Yes it reversed some of Friday’s ugliness, but volume levels today were less than half what they were during last Wednesday’s heavy distribution day. This low volume recovery is setting up for a very nice short. At long last we are finally getting some serious volatility and some good trending. It’s hard to see it from a microcosm but if you step back and look at what has occurred over the past few weeks the trend is very clear: Long term support lines broke down early this month followed by several days of heavy distribution. Now while the serial bottom callers are coming out of the woodwork, the major indices have merely pulled back to their 10-day averages on ever decreasing volume. The market could still pull off a recovery here, but from our vantage point the odds are very low that it will. Odds are much higher that we will see another spike down before serious buying interest returns. Don’t try fighting the current here; if by chance the market does recover there will be better long set ups than are now being presented.

S&P 500 Breakdown

SPY

The S&P 500 broke its long term trend last week. Since this time it has retraced 50% of its losses to its 20-day average on decreasing volume. This is an ideal short set up. One of two things is likely to happen here. Either the price on the SPY will drop from this level making a new leg down to its 110-112 support area. Or, the price will move back up to the broken trend near 119.

Bulls should want to see a drop to the lower area since this will create an excellent buying opportunity and a likely hard oversold bounce. If it continues to trade up to the 119 area first it will have longer term bearish implications; especially if it continues higher on anemic volume levels.

Waiting for Confirmation
Mood:  not sure
Today continue to focus on our open short positions. The market appears to be consolidating losses as it works off its near term oversold condition. Until the downtrend breaks it should be assumed that it is still in effect. Serial bottom pickers will get the bottom right eventually, but it doesn’t count if they get it on their third or fourth try since a lot of money is wasted on the wrong calls. We don’t know if the market put in a low that will hold on Wednesday, but it seems likely to us that that low will at least be tested once more before we get a significant turn around. On Friday the market showed some strength into the close, indicating that we may yet see another day of failed follow through – this time to the down side. Selling pressures over the intermediate term are still strong though and we are looking for another leg down before all is clear on the long side. Determining the big market picture is subjective and the interpretation largely depends on what you are focused on. What is less subjective is the types of set ups that show up in our scans. We scanned heavily over the weekend and couldn’t find one decent long set up from the 250 charts that we pulled up from our scan criteria. We did find plenty of short positions in fact. Even so, we expect to see at least another day or two of strength as oversold conditions are worked off. Thursday’s bounce let off a lot of steam, but not all of it. So again, today it is best not to get aggressive but instead wait on the sideline or in open trades for better positioning.