Locker Room Talk
The
hyped up early gap ran to an intraday high
of 924.58 for the SPX
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PowerRating).
The .786 retracement to the 965 high is 923, and yesterday’s R2 pivot level was
921.64. It is also just below the head-and-shoulder neckline at 930. This was
the short trade of the day for futures and
(
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PowerRating) traders as it also came in
the extended volatility band zone. The 1.5 volatility band for the SPX yesterday
was 921.06, and the 2.0 volatility band was 927.76. All of this confluence and
the straight early up move by the major indices made this a high-probability
short zone.
The afternoon’s decline
took the SPX back into the recent trading range, with an intraday low of 900.96,
but then closed at 908.35, +0.8%. The Dow
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PowerRating) was +0.6%, and the
Nasdaq
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PowerRating) +2.6%. NYSE volume increased to 1.63 billion, about 15%
above average and the most in the last five days, the volume ratio was 68, and
breadth +574. In the sectors, the
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SMH |
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PowerRating)s at +3.8%, XBD, +1.6%, and the CYC,
+1.0%, led, while the BKX, RTH, OIH and PPHs all closed red.
In response to several
e-mails, my thoughts regarding the election and its effect on the market are
that if the Democrats gain control of both sides, then I feel it’s a better than
50% chance that the SPX makes new lows to the 650 – 670 level. If the
Republicans win both, then I think that the shorts will be squeezed big time,
institutions will pile on, forcing the hedge funds to play catch up, and the
excitement would extend this rally above the 945 – 960 resistance zone before
any significant pullback. If it remains as is, then I think it’s a 70%
probability that the low is in, and we get a pullback to form a 1,2,3 higher
bottom before a try at the Third Wave move.
The most common thread I
hear is money managers and individuals talking about getting in on the pullback
because they didn’t get in enough from the high-probability zone, which of
course, never looks good. If you actually believe there is a fundamental bell
that goes off and tells you, “Now, folks,” forget that trash talk.
The prevailing opinion
rarely happens, as the market never makes it easy for you to get in. To me that
means that the pullback might be less than expected, say no more than about a
.38 retracement to the 769 low, or else makes a new low regardless of what
happens at the polls. These two threads are the least expected scenarios, so I
will give them the most respect. If you got in early on the RST or 1,2,3 lower
bottom and reversal of the 776 low and have been riding it up, then your
decision is like mine: we get a chance to hedge into this current resistance
zone, just as we did last time from 940 – 965 before the crack down to 769. I’d
say that is rolling your costs down pretty good while still maintaining your
position.
The other thing I am
watching closely is that interest rates are at 40-year lows, and it appears they
will be lowered one step closer to zero, and at the same time, commodities look
to have bottomed in the expected 2001 long-term commodity cycle zone. The last
thing you want as an equity investor is a high-inflation, low-growth
environment. We have just completed two full cycles of lower inflation and high
growth since 1982. Never in history has there been three periods like that in
succession. For most of you that didn’t trade from 1965 to 1982, you will have
tremendous trading and investing adjustments to make, none of which are easy if
in fact, we enter that kind of period. I would sure like to catch a few stocks
out of the multi-year flat bases that I have just seen several commodities break
out of. Pay heed.
Have a good trading day.
Five-minute chart of
Monday’s SPX with 8-, 20-,
60- and 260-period
EMAs
Five-minute chart of
Monday’s NYSE TICKS