Small Cap Network Blog

I was hoping for a little more of a retest yesterday. The major indices spent a fair amount of time in the red, but didn’t sink all that deep - only a pullback of about 1.3% at the lowest point of the day. By the close, the loss had been cut to less than 0.5%.

So why am I complaining? That dip didn’t retest (touch) the 20 day moving average line or the 50 day moving average line. Worse things have happened, but we still don’t yet know how the bulls are going to respond when really - and I mean really - pressured. So, it’s a task that I think still has to happen sometime.

As of right now though, it doesn’t look like it’s on tap for today - the futures are well up this morning (about 1.0%, depending on the index). The bullish effort isn’t likely to stay that strong for good, as we’ve seen recently that the morning futures are exaggerated at best, and downright pointed in the wrong direction at worst…sometimes. Perhaps today will be an exception, and the strong pre-market activity will carry through the entire session. I have my doubts though. I’ll let you know for sure at the end of the day.

In any case, a couple of bright spots…

I’ve been waiting for the S&P 500 to make that all-important close above 918, which it did on Friday as well as Monday (even with Monday’s slight selloff). And second, Obama’s tax cut plan appears to have teeth. It may take months or even years before any effects of it are actually felt, but it’s inspiring a little confidence in the meantime.

Any downsides?

Yeah - Obama’s tax cut plan may take months or even years before any effects of it are actually felt. It’s not apt to keep the market inspired long enough to prop stocks up all the way into the second half of the year. We’ll need some other motivation in the meantime.

As far as today goes, it looks like the early strength is stemming from retailer and automaker raliies in Europe. Let’s see if today’s ISM numbers for December - or the Commerce Department’s November factory orders - hurt or help the effort; they’re both due this morning. The National Association of Realtors’ November pending home sales report is also scheduled to be released this morning. It should be ugly, but how ugly is the question.

The Fed’s also going to release the official minutes from their last meeting later today…. the meeting where they cut rates to 0.25%. It should be a non-event, but maybe there’s a nugget in there we didn’t know about yet.

By the way, I’ve noticed something lately… a lot of perma-bears seem to be coming out of the woodwork now, warning us that things are going to get worse, and that the current strength is just a sucker’s rally. Or, maybe it’s just that the media is more interested in giving them an audience and less interested in talking to the bullish commentators. I’ll just say this about that recent trend - don’t assume they know any more than anybody else. My advice is the same as (and I cringe to say this) Jim Cramer’s advice….. don’t listen to the gurus - listen to the market.

But isn’t Jim Cramer a ‘guru’ too? Yes, he is, and he’s a bit of a goof in the grand scheme of things. However, I think he’s absolutely right about focusing on what the market’s doing instead of what all the pundits are saying it’s going to do.

As far as what it’s ‘doing’ goes, though I still have my doubts about everything, the indices are above their 20 and 50 day lines for the first time in months. The 20 day averages are above the 50 day averages in months. The VIX is just above multi-month lows. Maybe the market is going to climb this wall of worry.

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After five days of a mostly-bearish drift towards the lower side of a narrow trading range, the S&P 500 bounced up, fairly firmly, to highs not seen since the 19th. It was the best close since the 17th. Not bad. Not great, but not bad. My only beef stemming from the analysis is that - once again - the 50 day moving average line (purple) is acting as resistance. And bigger picture, my line in the sand at 918 still hasn’t been crossed. So, I guess I’m not overly-excited for two technical reasons.

The VIX closed lower, though no lower than the bottom edge of its near-term range. That’s still more on the bullish side of the fence though… just very weakly. It’s probably more a sign of volatility being reigned in than a directional clue for the market.

The futures are barely in the black as I write this. However, I suspect today will be an very uneventful day, and more apt to be slightly on the bearish side as traders wrap up any selling for calendar for 2008. There’s no particular advantage in buying in calendar 2008, so any significant pressure should come from the last minute sellers. Even then, it should be barely perceptible, as most traders are not working….volume should be oddly light.

My advice for investors is to do the same - take care of whatever trading/investing business you need to as soon as you can, and enjoy some time off after you’re done. I’ll be working, but that’s my problem.
I may add another blog entry later today, but if I don’t get to, have a great and safe New Years event (whatever that may be for you).

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If my math is right, after Monday, 11 of the last 15 Mondays have been bearish. So, I’m not too rattled by yesterday’s selloff… it’s par for the course. My concern is rooted in something much deeper than that. Remember the 50 day moving average line (purple) we started to toy with on the 16th? We still haven’t broken past it. Usually - though not always - those breakout moves happen pretty quickly and decisively. I don’t like the way this one is lingering…. I don’t get a warm fuzzy for the bulls.

Likewise for the VIX - after reaching new multi-week lows last week, it’s just been moving sideways (though the market has too).

If I were totally objective I’d point out how the last four days were nothing but a consolidation phase, and I wouldn’t be an optimist or a pessimist. I’ve been trained to be skeptical though, which has been the most productive/profitable mindset since October.

The good part about a consolidation phase is that whichever way the index ends up moving out of the tight range, it should stay pointed in that direction for a while. We might be able to squeeze a trade out of it.

Futures are up this morning, though they were up yesterday morning too when the Gaza/Isreal situation was less troubling. Either the conflict there wasn’t the real reason for the selloff on Monday, or someone is trying to push the futures higher so they can sell a bigger position into that early strength.

It just makes me want to reiterate something… the only price that matters is the closing price, which lately has only been determined in the last hour of trading. I wouldn’t worry about the futures or the opening price much, if any at all.

I’ll update this chart at the end of the day.

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Looks like the tepid buying mood we witnessed in Friday’s lethargic session has carried through to this morning - index futures are up slightly. So is oil though, thanks to some geopolitical turbulence in Gaza. It’s nothing unusual though, so I don’t see oil prices staying pressured for too long. Either way, trading should remain thin - even if modestly bullish - this week, as most traders are taking the week off to celebrate Christmas and New Years.

Just to catch everyone up, we’ve been semi-optimistic about the apparent change in the market’s overall direction. The S&P 500 broke out of a bearish rut in early December, and started to make higher lows. That’s good, though we haven’t actually seen the SPX make higher highs yet. In fact, the index closed under the 20 day moving average line (green) on Friday… a pretty clear indication to me that things aren’t en fuego.

The line in the sand is still 918, which the S&P 500 has brushed several times in the last few weeks, but has thus far been unable to hurdle. If we get above that line, then I’ll be very excited. Take a look.

Now, as far as oil goes, it’s been a while since we looked at a chart. I’ll correct that today.

The daily chart is pretty much meaningless anymore, since the pullback has been so huge, and so prolonged. I’ll show it to you anyway just to make that point.

So, we have to focus on crude’s weekly chart to get any kind of reasonable bearing on what may be next for oil. Take a look at this chart and see if you spot what immediately caught my eye.

Yep, last week, oil futures matched - but didn’t fall under - the lows seen in late 2001 and early 2002. I don’t think it’s unreasonable to assume support’s going to be made there. My key clue is the fact that oil’s trading well off those lows today. However, being waaaayyyyy oversold is a decent argument too.

How far might any bounce take us? I’d look to the $59-ish area; it’s been support as well as resistance in recent months. That’s just a rough guess though. We’ll pinpoint a target for oil when/if the need arises.

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At 3:25 PM EST all hope seemed lost…. the S&P 500 was under water by 3.2%. Within 35 minutes, things didn’t seem nearly as bad - the S&P 500 only closed 1.8% below Friday’s close. It’s still a loss, but one that leaves the bulls with reasonable hope. Indeed, the strongest volume of the day came with the rally in the last 30 minutes of trading. The bulls are resilient, even if a little flighty.

Anyway, I promised a chart update, so here it is.

Even with the last-minute (well, last-hour) rebound though, we still saw the market close below its 20 day average. Not good. As I mentioned yesterday, however, volume is going to be light this week, and will get lighter as time passes. So, this is not a majority opinion….. it’s just a frustrating drift. (Still, how things take shape this week sets up how they do next week.)
As for the VIX, you can’t deny it looks like it’s pushing off that lower Bollinger band line. That’s strike two.

The futures are on the plus side of the  board this morning, though that may not mean much - if anything - regarding how we’ll end the day.

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Just for the record, 10 of the previous 14 Mondays have been bearish, so don’t get too worked up about this one. Considering how far we’ve come since this point in time last month, the bulls deserve a break. My only worry is the one I gave on Thursday… that the recent retest of the 50 day moving average line was just going to end up being a set-up for a knock-down. The S&P 500 is back under its 20 day moving average line today; that line needed to hold up as support if the bulls were going to stay decisively in the hunt. So, today’s a bit of a wrinkle.

The day isn’t over yet though. In fact, I’m inclined to give the market through the end of tomorrow before I close the book on any potential rally.

That said, I’ll also point out that the VIX is indeed finding support at its lower Bollinger band (20 day)… a known reversal point. That doesn’t exactly encourage.

Check back at the end of the day for an update on this chart. Everything could change - radically - in the last hour.

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If the last several weeks hadn’t taught me to be so jaded and skeptical of any rally, I’d probably be very excited to see the S&P 500 on the verge of breaking above a significant resistance level. As it stands though, I’m not going to fully believe it until I see it. When the S&P 500 moves past that ceiling of 918, then I’ll get excited. The VIX, on the other hand, is doing a much better job of convincing me to be bullish.

The chart below says it all. There’s resistance at 918, where the market has topped-out or stalled too many times lately. But look at the VIX. The volatility index has already fallen under a short-term support line (dashed), and is close to moving to new multi-week lows.

My only concern right now with the VIX is that it’s just now running into its lower Bollinger band, which we know is a potential reversal spot. This time, however, there’s a little more momentum behind its pullback - it may be able to keep driving the lower band line even lower.

Notice the S&P 500 hasn’t yet tested its upper Bollinger band; I’m not sure what’s going to happen when/if it reaches it. Based on what I see so far though, I’m inclined to think the SPX will keep driving higher. The key is getting past 918.

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The bulls may not perfectly hold the ground they took back yesterday, but at least they advanced into it. It’s an attempt they couldn’t have even made a few weeks ago. And, even today’s early retreat isn’t a permanent situation. I, for one, am excited about this shift in momentum.

What exactly am I looking at? For the S&P 500 (and all the other indices), it was yesterday’s cross above the 50 day moving average line. We haven’t been above that line since early September. I’m also looking at the CBOE Volatility Index (VIX), which has been under its 50 day line for several days (that’s bullish), but yesterday moved under what had become a relatively significant support line.

Of course - and par for the course - the futures are deep in the red today. I guess the Fed can only buy so much of a rally despite a rate cut that takes lending costs to unprecedented levels. I’m not surprised - the one thing that’s been such a pain for this market over the last several weeks is a stark inability to string two decent days together, back to back. That entirely stems from a lack of moderate pacing… it’s nearly impossible to rally 5% in a day and not invite profit-taking the next day. Hence, we’re headed for a lower open, at least according to the futures.

Even then (and as you’re probably tired of hearing by now), the only price that means anything is the closing price, which has only been decided in the last hour of trading for the majority of the last several sessions. So, don’t worry too much about the bearish pre-market pressure. You can check in around 3:00 PM EST and catch all the important action.

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It’s a stand-off at 895 for the S&P 500. The bulls and the bears are each waiting for the other side to flinch…. to make a strong move above or below that level. After a three-day wait though, fatigue and boredom are starting to set in, and the tension is building. Now it’s likely to be a matter of who walks away from the contest first - a forfeit of sorts.

I do think whatever’s going to happen is going to happen soon. Once the S&P 500 popped above a resistance line (orange) as well as the 10 and 20 day moving averages (red and blue) on Monday, it stalled. Since then, it’s been working its way into a shrinking wedge (lower highs, higher lows, black lines), which will have to be broken sometime.

Outside of the smaller wedge is a not-quite-as-small wedge framed by the 50 day line (purple) on top, and the 10 day moving average line below. That wedge is also closing up too.

Clearly sooner than later those support levels or resistance levels have to give. It appears like the bulls have a little more fight than the bears do right now, so I’m willing to bet bullishly. Well, actually we did bet bullishly … we bought the SSOs last week. We’re up 12% so far on the trade, but are looking for a little more upside.

Either way though, this is  a classic consolidation, on a very small scale. The thing to keep in mind about wedges and consolidation is that once the boundaries are broken, the move outside of those boundaries is usually big, and fast. So, you speculators may not want to mull it over too long.

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Looks like you can scratch everything I said in this morning’s newsletter about Monday’s generally being bad. The market opened higher today, and is still rising. Why? Because Obama’s plan is really starting to materialize. Never mind the fact that he also said the economy was going to get worse before it gets better. Geez.  Frankly, I was prepared for his pessimistic remark to drop a bomb in the market, but I guess investors are fed up with selling … now they want to be buyers. Nothing really transpired over the weekend with the President-elect’s stimulus plan - it’s just starting to gather steam.

So am I bullish? Bigger picture, yeah. Short term, no. This is hardly a well-paced rally; the market is now up about 11% for the last five trading days. That’s got to be creating some tension for the nervous-Nellies who lock down a winner early and often. I just don’t see a continuation of this uptrend without a pullback first… even a minor one would do the trick. Heck, even an intra-day one would bleed off the pressure enough to keep things from over-heating, but no - the all-or-nothing mode is still intact.

So, I’m sticking to my guns. Though the odds favored Monday being the big pullback day, I still say we’re due for a dip sometime this week. Once the bulls are humbled for a day or two, then we can really gauge the market’s temperament. In that light, I remain bullish.

Today’s gains are nice, but they lack volume … the one thing I mentioned would be necessary to trust any rally.

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Like I said on December 1st, on December 2nd, on December 3rd, and on December 5th (I just didn’t get a chance to on the 4th), the only price that matters is the closing price. I also said in each blog/rant that the bulk of any change in the closing price was the result of the last hour of each trading day. Lo and behold, we’re seeing it yet again today. Stocks were in the red until about 1:30 PM EST, then everything radically changed. As we rung today’s closing bell, the bulls were still accelerating, up 3% for the day. That last hour of trading is still where it’s at. Wow. Anyway…

Folks, investors want to be buyers here. Except for Monday, each day this week has given us very strong buying right before the session is over …. the decision-making time. And Monday is a different beast altogether. People are weighing their odds - albeit carefully - and deciding the bigger risk is NOT being in the market by the time the next morning’s opening bell is rung. That’s bullish.

But what about values? Yeah, we’ve had this conversation before too … the idea of valuation was tossed out the window a long time ago. It was replaced by hysteria and irrational logic. (I’m pretty sure ‘irrational logic’ is an oxymoron, but you get the idea.)

I fully see all the fundemental problems most companies are facing now, and will face in the future. The problem is, the market way over-estimated just how bad things would be, and how long things would stay bad. I still don’t think anybody has a perfect bead on what valuations should be for most stocks, but based on this week’s action it seems like most investors realize the end of the world isn’t quite nigh.

Check out the intra-day chart of the S&P 500 below. You can see how well the market did near the end of each day. Even on Thursday we saw a pushback off the lows, despite the daily loss. To see this kind of action on a Friday (in front of a weekend) is even more compelling.

I’ve got a newsletter coming out this weekend that looks at this idea (and others) in more detail. Specifically, I want to revisit some possibilities why Monday was so nasty, but was unwound over the rest of the week. Be sure to look for it.

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A 3% dip for the market isn’t exactly a good thing, but considering we were down as much as 4.2% at one point on Thursday, the small rebound late in the trading day helped stave off what would have otherwise been a bit of a nasty loss. Of course, the question we’re all asking now is… what’s next? Is Friday going to be like Thursday was, only without the last-minute recovery? Or is Friday going to be like Tuesday and Wednesday, which were bullish?

Frankly, I don’t know, but I do have a handful of things that can help us weigh our odds and compare the current risk/reward scenario.

That nagging resistance line I mentioned Wednesday? Yeah, well, it’s still nagging. The S&P 500 bumped into it yesterday, and promptly proceeded to pretty drastic lows. Needless to say, that line is still in place; it’s at 860 today.

You can add the 20 day moving average line (the thin green line on the chart below) to the list of hurdles the SPX needs to get past before the bulls have anything to be proud of.

In the bigger picture, the chart says the momentum is still bearish. However…

If there’s one thing we’ve learned this week, it’s that we can’t trust any trends to last more than a couple of hours. Over the last three days, the market has been well up in the morning, sold off hard in the middle of the day, and come back - firmly - late in the trading session. If you’re a chart watcher (which I am), it’s been a real roller-coaster. The point is though, there’s not been any logic or consistency to things. It actually seems like the market is trying to move higher, but there’s not enough of a concerted effort to make it happen; that’s the effect of a day like Monday - it keeps a lot of buyers scared away.

Anyway, the futures are in the red this morning, but that means nothing anymore. They were in the red yesterday morning too, but the bulls bolted right out of the gate. They faded by 11 AM, but they still bolted out of the gate.

Let’s see how today closes before getting too comfortable with any calls - I’m not writing the bulls off yet. In fact, I’m somewhat expecting a strong showing from the bulls next week, and possibly even today (as I described in yesterday’s newsletter). If we don’t see a gain today, I’m not going to be too upset; it’s tough to risk holding stocks over a weekend in this environment. Holding them over a weeknight isn’t terribly risky, but being stuck with a stock for two non-trading days can feel a little riskier when the environment is shaky.

Either way, I suspect next week will actually be more bullish than bearish. Our trade’s stops are still important though, since my crystal ball is broken.

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Looks like Tuesday’ half-hearted rebound was just a breather for the selling .. the futures are in the red this morning. On the other hand, the pre-market indications haven’t been all that accurate lately. DSo, dn’t start the trading day (at 9:30 AM EST) with any assumptions, as there’s been no consistency or carry-over from where the market was ’supposed to’ get started or where it was ’supposed to’ go.

Anyway, thanks to Friday’s rally and Monday’s pain, a new resistance lines appears to have developed for the S&P 500 … a falling one. It’s not perfect, but it’s significant. Today it’s at 865, but falling sharply every day as well; it’ll be at 855 tomorrow.

If the market opens and stays in the red, this resistance line will be irrelevant except as an academic study - we’ll be facing the other direction. Someday though (hopefully) we’ll be able to celebrate crossing above that line. Dare I dream?

Support’s at 743, where we hit multi-year lows last week.

Buckle up - today could be another bumpy ride (though not necessarily a bearish one by the end of the day).

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Where’d all the buyers go? Maybe they’re still napping off all that Thanksgiving turkey, because they sure aren’t putting any money into the stock market today. Still, today’s early weakness isn’t a reason to panic. Last week’s gains were close to record-breaking, so it’s not a surprise to see some profit-taking now. Don’t worry about it … it’s not an epidemic yet.

The key to figuring out just what the market’s thinking is the last hour’s action. That’s where most of the net day-to-day movement has been playing out the last several days … and it’s been mostly bullish so far.

I’m not advocating that we all go out and buy every stock in sight, because there’s a good chance the market will keep sinking. I’m just saying to make the call in the first hour of trading (after a holiday weekend no less) might be an errant move. Sit tight here - more to come.

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Wow… not bad. Not only did the market gain more than 6%, it was the second consecutive day of big gains - for the first time in months. Too bad today’s bullishness a minority opinion. Had it been a majority, the rally may have had a shot at lasting for more than two days.

As I suspected/feared in this morning’s blog, a little too much strength at this stage of the game would incite profit-taking. And, it did…the indices were pressed lower a few minutes before the close (though they did an ok job of holding most of their ground they gained today).

More alarming, however, was the lack of volume behind the gains. Not only was there a lot less volume with today’s gain than there was on Friday, today’s volume was mediocre at best. It’s hard to get bullish when the buyers - most of ‘em anyway - won’t get on board.

The chart below of the Dow Jones Industrial Average ETF (the ‘DIAmonds’) shows you what I mean. We peeled back from the highs a little, and there weren’t nearly as many buyers as the percentage gains would have you believe.

Now, I’m not saying we’re back to square one, nor am I saying the market’s going to completely implode. I’m just repeating my warning I’ve voiced a couple of times now… don’t get suckered in - the market hasn’t accomplished anything of significant bullishness yet.

From here, the ‘ideal’ for the bulls would be a good pullback to somewhere at least in the middle of Friday’s trading range, and then a recovery. Give the bears their shot to send us lower. If they don’t take it, then we can start thinking about more upside movement.

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All the market had to do was open modestly. A little lower would have been nice, but even an opening price under Friday’s high would have been fine. But no, the unveiling of Obama’s economic dream team prompted stocks to jump before the opening bell rang. The result is – or was – too much distance between today’s lows and Friday’s close. Though there are no gaps for the actual indices, all the major index ETFs have spaces between today’s lows and Friday’s highs … a problem that will likely be corrected before the market can move any higher.

Figures. I think I’ve said this a hundred times now, so here’s a hundred and one – the market has to pace itself if there’s to be any longevity to any trend. Today’s jump is not well-paced. Now we have to go back and fill in the gap. The problem is, the move lower that will close the gap may also be sustained. There are a lot of nervous, would-be profit-takers out there right now. One false move and we could get some chain-reaction selling that will drive us to new lows again. All we had to do was just start a little lower, and work our way up during the day.

Anyway, from here, the ‘ideal’ situation for the bulls would be a deep low today, and then a recovery – even a partial one – by the end of the day. That will bleed off some of the selling pressure, but also confirm that the market is able to resist selling pressure and come back strong.

But what the hell do I know? Looks like the market (so far anyway) doesn’t care about the gaps, as it’s going higher, full throttle.

Check back later today - this is going to get interesting.

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Well, a few months ago I never thought I’d see it. Since September though, I have to confess I’m not totally shocked. On Thursday the market fell under - and stayed under - 2002’s lows. We’re now back to where we were in 1997. Buy and hold anyone?

The bad news is, that’s 11 years of wasted time, if you were hell-bent on buy and hold. If you were willing to take profits, and make an occasional bearish bet, you’re probably still ahead of the game. However, odds are you were still adversely affected by more than a little bit.

The good news is, if you didn’t put one penny into the market but know that you should have over the last decade, well, you’re essentially ‘caught up’…. and I’m saying that with complete seriousness. You can start right where everybody else started a decade ago, since they’re back at the same starting line.

Anyway, I came here to talk about opportunity, and reality.

I know the tumble to new lows is supposed to be wildly bearish, and maybe it is. However, there’s that voice in the back of my head that keeps reminding me that the harsh move lower may well have taken out any remaining stops. In a sense this could cleanse the palette so we can finally just get the capitulation under our belt. I’m not saying today was it, but let’s face it - what is there left to prove? How much worse does it have to get? Everybody about as busted up as they could be.

Investors have also been filling up the sidelines for weeks now, holding lots of cash, and adding more and more as time passed. I believe cash positions were greater this time around than they were in October of 2001. Frankly, I’m surprised anybody had any stocks left to sell… but, we’ve transacted tons of them the last few days. Where’d they all come from? Wow. There can’t be much left to sell.

The point is, I can see the market sinking to new lows just far enough and long enough to convince everyone to dump anything they’ve got left, only to set up a major bounce. As such, I’m wondering if we need to take a swing on a bullish trade. I don’t know if it will be the beginning of a new bull market, but I think it could still be a nice upside move … if only because nobody expects it.

I don’t know - maybe the gears in my head are just spinning really fast right now. Look for more thoughts on this potential trade tomorrow.

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In the very short run (as in a couple of days), I’m fairly bullish. Longer-term, I’m bearish, based on yesterday’s breakdown and today’s downside follow through. After yesterday’s beeline from the open of 859 to the close of 806 for the S&P 500, I was expecting an upside reversal from the onset today (as I described in an earlier blog entry). Instead, we opened much lower, and then continued to sink.

So how am I bullish in the short run? The VIX hit its upper Bollinger band, and the market is well above its lows for the day. I think both are the result of just falling too far, too fast. I’m looking for a quick correction of the drastic move lower (which means a brief bounce), and then a continuation of the bigger-picture selling… all three indices hit new multi-year lows today.

One caveat - I don’t know that I would try to trade any of this just yet. We may be due for a short bounce, but I’m also looking back at the S&P 500’s chart between October 2nd and October 10th. We saw seven straight days of massive losses, and there’s certainly no reason it couldn’t happen again.

But what about the VIX? It also did the uncanny between 10/2 and 10/10, by plowing into new high territory without a second thought. So, we can’t make assumptions here either.

The best thing the bulls have going for them at this point is the VIX’s gap this morning, and the upper Bollinger band. That ain’t much to take to the bank though.

Let’s see where this all goes; I’m not fully convinced either way.

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You probably know by now the market reached and stayed at new multi-year lows on Wednesday. Obviously that also meant those key support levels are broken (except for the Dow). Though the momentum seems bearish, there’s something that keep nagging at me, suggesting we shouldn’t get suckered into selling anything new at this point. 

Remember what I was saying a couple weeks ago about extremely big moves that end the day at the very end of the range? Those tall candlesticks with little to no wick are called ’Marubozu’ bars. Normally they’re interpreted at face value … a bearish Marubozu bar means more downside is on the way, and a bullish Marubozu means bullishness is in store. In the current environment though (the last two months), Marubozus have more often meant an exhaustion of that trend, and signaled a reversal.

Well, care to guess what kind of bar we got yesterday? I’ll give you some hints - the market was down a whopping 5%, opened at the highs for the day, and closed at the lows for the day. Yep… a Marubozu. Not that it’s the gospel, but we’ve just seen too many reversals following extreme moves lately to ignore this one, or to assume more selling is in store right away.

As I write this, the futures are in the red, which sort of works against my theory. Then again, the futures have been a meaningless indication of how we’re going to open lately. I’ll actually wait and see how we open, and then see how we progress.

If the indices get comfortable down here, then I think we all need to start hedging, buying puts, shorting, or whatever it is you do to stave off a selloff. Let’s see how things play out before pulling the trigger though.

Check my other forthcoming blog entry though - I’ll be looking at a couple of things that are close to pointing to bullishness.

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The sellers have thrown everything they can at the bulls over the last three days, and have certainly done some damage. However, the market has managed to hold its ground so far. On the other hand, we’re about as close to the edge of the cliff as we can get before actually falling off.

Lo and behold, the same support lines I’ve been talking about since October are coming back into play today. For the S&P 500, that’s roughly 818 … last Thursday’s low, but also the rally point for the huge one-day bounce. Today’s low so far has been 827, but the bears are definitely putting the pressure on…or were, until late in the day. The Dow and the NASDAQ aren’t knocking on the doors of new lows yet, so I’m not overly worried.

However, I am kind of concerned about the VIX, and the apparent lack of fear investors are showing as we’re on the verge of even further long-term losses. Granted, we’ve also become largely immune to big losses, but the VIX has at least responded as expected during selloffs. The VIX closed a little lower, as the market closed a little higher. But, both moves lacked a little conviction (and we’ve seen it a dozen times now - a reversal late in the day that doesn’t even survive through the next day).

The ‘lack of fear’ is evidenced by the way the VIX has not yet run into that upper Bollinger band. That means there’s more room for it to move higher before it starts to hit a headwind. Stocks could fall in the meantime.

Now, will stocks fall? Don’t know - this is an odds game, not  a science. I don’t want to bet against the market until those support levels are broken, but I also don’t want to be on the market while the VIX is on the rise. Today’s turnaround at 3:00 p.m. EST just makes the matter more deceptive. So, I guess I’m choosing not to play until I know there’s a hand I have a better-than-average shot at winning.

One way or another we’ll have some clarity soon. I just think it’s still a little bit bearish that the selloffs are still coming so easily, and we’ve started to spend more time on the southern end of the recent trading range. 

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