How to trade the S&P when it’s at the 200-day MA
When the market is in a
sell off of the magnitude we experienced this past week I like to see a big down
opening, bringing on some panic selling creating havoc and capitulation.
Market makers and specialists love the big down opening to help put an end to a
sell off such as this one. When you get the big down opening the dealers will
bring stocks way down to levels where they know there are buyers while flushing
out the sellers. Market makers will try to get long as much as they can as these
levels are usually overdone and can create quite a bounce and or new up trend.
Almost like a vacuum up. The operative word is try. It’s very difficult to hold
a position with action like this. You must react fast to replace the sales you
make to customers if at all possible. It isn’t always possible.
There are times when you are unable to hold onto
your positions and even end up on the short side of a situation. This is when
some of the big institutions come in at these artificially low levels and get a
few of the larger dealer firms short. Not a good feeling knowing a stock is at a
price where it shouldn’t be and someone with a lot more information than you
just bought a ton of stock from you and there is no chance of buying it back.
Buyers are also woken up at the bargain prices to add more juice to the rally
off the lows.
With the S&P trading around its 200-day moving
average, after closing below earlier this week for the first time since May, the
market will most likely trade more erratic than usual until it’s direction is
resolved. Crazy things usually happen with the S&P around its 200-day MA. There are
some big decisions being made by portfolio managers with lots of money at stake
based on this average. Look at the action back in April and May of this year.
Once the 200-day MA was broken the market bounced around for a while before
putting an end to that decline with a nice rally. Maybe the snapback late in the
day Thursday was the wake up call the buyers need. Hopefully we will find out
soon.
Good luck trading and have a nice weekend.
Ken Levey
Kenneth Levey is head of Trading For Connors
Capital LLC. Mr. Levey has more than 21 years of professional trading experience
having previously been Vice President of Trading and a Market Maker for Spear,
Leeds & Kellogg/ Goldman Sachs in New York. Ken is a 1984 graduate of the University of
Miami where he received his degree in Business Administration majoring in
Finance.