Thursday, October 16, 2008

In a New York Minute...Everything Can Change

Well, its been a busy day on my end so that's why I haven't been able to post till now. My trading and watching of the markets during today was cut short of the norm because of other obligations I had to attend to but nonetheless, that was one hell of a outside reversal, wasn't it?!

An outside reversal is a day where we gap down (starting lower than the previous days close) and reverse mid day to close near the highs and today those highs were substantial. From bottom to top today we rallied about a good 750 points or so. This kind of reversal pattern is quite bullish normally and I would expect it to give us a boost into the next few days.

My main observation today was that there seemed to be a "wall of worry" effect in the markets. Everyone was very bearish after we gapped down hard, we saw the VIX hit 81 at its peak early on, credit spreads narrowed (more so in the afternoon). And with all that there was nothing announced that was dramatically worse than yesterday. Initial claims actually came in slightly better than consensus, but still high. Yet, it seemed the negativity had soared overnight for no material reason. This is the "wall of worry" effect and it usually builds to a point where the fear just cant be justified by the price action so the markets start to grind higher and eventually it squeezes the shorts into covering their bad bets.

The rally really took off today after the key 220 pm ET reversal area that I watch for each and every day for a possible change in trend. We raced into the close to finish with the SPX around 946. We are still well below the 1020 level I am watching for this market to retest eventually and perhaps form that larger inverted H&S pattern on the 60min chart I outlined in yesterday's post. Its not out of the question that we race towards that level in the next few days, especially since weird things can happen on options ex day. I tend to think the market will be stuck in this current range (SPX 890-1000) for the next month or so. I dont forsee any huge rebound above this range, nor do I see a break of last week's lows occurring.

With that said, Friday is options ex and that day is famous for being one with choppy waters, and sometimes even better to not trade. However, if today's burst of buying continues you can see a heck of an exaggerated move to the upside. Trade safe and remember in a New York minute, everything can change!

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