Wednesday, May 26, 2010

Reversal Follow Through Continues this Morning

The reversal [May 25, 2010: That's a Reversal] follow through continues this AM, highlighting a problem that has cursed traders for much of the past few years. So much of the day's movement happens premarket nowadays.

The large move in early hour action should have the S&P 500 into the mid 1080s right from the open, leading to some less significant resistance at 1090 (the intraday highs Friday and Monday) and then 1094 which was the "day after flash crash" lows. After that comes the level every computer will be watching - the all important 200 day moving average at 1102. (the simple 200 day moving average is 1003.5) All that movement can happen in a snap of a finger in the modern day market, where yesterday's news is forgotten (North Korea who? Spanish banks what?) as long as the "charts" and "action" sing to us.

With so many broken charts, this sort of bounce *should* work off oversold conditions and take a lot of stocks up to resistance areas where - historically - they are to be shorted. But anyone who has followed that game plan since March 2009 has been eviscerated as the infamous "V" shaped, low volume recoveries crushed bears. Hence as Clint Eastwood would ask "you feeling lucky, punk?" So the only question here that matters is (a) needed oversold bounce to be shorted once resistance is hit or (b) here we go again, the 'V shaped bounce' that slices through resistance as if it does not exist is back?

What we do now have is a clearly defined 'bottom' of lower to mid 1040s on the S&P 500. A break of this level would portend more downside, but for now one can point to a potential 'double bottom' scenario.

Wildcards: A magical plan hatched by Tim Geithner who sits in Europe now, advising his counterparts on how to make bank stress tests that no one fails to ease markets fears. Or, the twisting of arm of ECB's Trichet (who Geithner is also set to meet) to go "hard core Bernanke" and join the Japanese, US, and UK in the quantitative easing nirvana. If you know anything about the history of Germany - the mere fact that the ECB has to contemplate such a move is simply mind blowing - but as we saw in the U.S. in 2008, cornered animals will do anything to evade reality.


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