Not A Positive Turn Of Events

11/10/08 1:00 PM EST

As of: SPX 1045 HELP  ARCHIVE

I mentioned this morning that in general I detest large gap up openings in the direction of my trade, and today's activity is a prime example why.

Unfortunately, I couldn't find much evidence before the open that suggested fading the gap was a high-probability endeavor, but it's been almost straight down from the opening bell, triggering what so far has been a picture-perfect trend day to the downside.

By "trend day", I mean a day that opens at one extreme and closes at the other, with only minimal retracements intraday.  By late morning, when we see very skewed downside breadth (check), virtually all sectors participating in the decline (check) and selling pressure come in every time the NYSE TICK pokes much above the zero line (check), the market tends to close at or near the day's low.  We have a check next to all three conditions today.

This is dismal action, and I'm becoming less optimistic that last week's low is going to hold.  We should have been able to hold the low from the first hour of trading this morning, and the fact that we did not just helps to reinforce that we have yet to see a positive change in character from other failed rally attempts.

About the best hope for a bounce at this point would come from technology as several indices there approach last week's low and a number of our shorter-term guides flirt with oversold.  From our intraday indicators, the Price Oscillator and Up Volume Ratio for the Nasdaq are nearing their lower trading bands, so oversold conditions there in combination with an approach towards an obvious support level might be enough to generate a bump higher assuming we don't blow right through it today.

We have a tremendous number of reasons from a sentiment-, breadth- and price-based basis to expect an intermediate-term rally, but given the multitude of "never seen before" stats we've discussed over the past few weeks, I'm not willing to stick with my modest long exposure if last week's low in the S&P 500 can't hold.  There's always the chance of a whipsaw (where we dip below an obvious support area like ~900 to wash out an resting sell stop orders just below that level, then immediately pop back above), but that's a possibility we'll just have to deal with it should it arrive.

Watching For A Change In Character

11/10/08 9:05 AM EST

Good Monday morning...We begin the day with some buying interest in the pre-market futures, which have been strong during the entire overnight session.

On Friday morning, we looked at what has happened since September when the overnight futures were very strong, and that has had a consistent tendency to lead to a strong session during regular trading hours as well, so bulls will be hoping for more of the same today.

We left off last week with a recap of yet another week with historical developments.  The back-to-back daily declines post-election was one of the few times in history we've seen such a massive drop two days in a row.

We went over the stats regarding previous instances last week, along with a review of several other measures, so I'm not going to rehash them all again this morning.  Suffice it to say that we saw a tremendous amount of panic in mid-October, several compelling signs of a tremendous buying thrust, and a pullback last week that generated oversold readings...all during a seasonally positive time of the year.

Data released over the weekend didn't add much to that argument either way.  Small options traders last week showed mixed behavior without signaling one extreme or the other, and other data we updated wasn't worth noting.  The one possible exception was the latest release regarding speculative "pink sheet" trading from October, which we went over in a Data Brief on Saturday.

Because of the factors we discussed last week, I removed the short-side hedges I had in place on Thursday afternoon, and am again left with about 10% exposure on the long side with an intermediate-term (one to three month) time frame.  Based on everything we've discussed lately, last week's low should not be violated, so I will almost certainly move back to 100% cash if the S&P cannot hold the gains from Friday.

There are an overwhelming number of factors on a sentiment-, breadth- and price-based basis pointing to higher prices over the coming month(s), but as we've had an opportunity to discuss more times than I can recall, we have also witnessed a large number of simply unprecedented developments over the past month and a half.

It's hard to rely on historical precedent when there is none, or the only ones in 110 years of history were from 75 years ago.  So if all those factors pointing to higher prices cannot take root here and now, then I don't want to hang around and just hope that they do while prices tell me otherwise.

I generally detest seeing large gap openings in the direction of my trade, since gaps are so often signs of emotional trading, and they tend to "fade" (i.e. reverse direction).  It seems as though large gaps up on Mondays should be especially cautionary, but historically they haven't been that bad.

Over the history of the S&P 500 tracking fund, SPY, there have been 22 times that it gapped up 1% or more on a Monday.  Buying that open and holding 'til the close resulted in a 55% win rate, averaging +0.4%.

It happened twice last month, and the S&P closed higher than the open by +7.9% and +3.6%.  The next day, the S&P closed lower both times, and by Wednesday of those weeks it had given back all of those gains and then some.  That will be another tell to watch for this week - if we can hold the gains of the past two days, then it should be yet another signal that the character of the market has changed and that should support still higher prices going forward.

For today, I don't anticipate making any changes to my positioning.  We're still emerging from oversold conditions on a short- and intermediate-term basis and I don't see a lot of reason to expect this morning's gap up to fade.  But as usual with a large gap opening, I will be closely watching trading during the first hour - if we can go on to make higher intraday highs after the first hour, then we should see an even higher close.  If we're going to succumb to selling pressure, though, then it should occur right away.

On a side note, we have added the Up Issues Ratio and Up Volume Ratio for both the NYSE and Nasdaq to our stable of intraday indicators that are updated every half hour throughout the trading day.