Snapshot Notes - October 18, 2007

As of:

SPX 1538

For the past few days, we've gone over a number of different studies related to the selling pressure this week that suggested there was a relatively good chance of seeing higher prices into Friday's option expiration and perhaps slightly beyond that.

As often happens during earnings season, we got a large gap up opening on Wednesday, and that seemed to change the dynamics. So now we've done nothing but flop around for a few days, in spite of being in the midst of relatively positive seasonality and some short-term oversold conditions.

That isn't a particularly good sign, especially when we're seeing it after going over a number of examples of excessive optimism among our longer-term indicators. Examples ranging from small options traders to newsletter writers to Rydex traders are showing that a large number of people expect the market to keep rising.

When we get that kind of one-sided opinion, the market has a tendency to not comply, at least not easily. It's rare to see a steady, sustained uptrend take hold when so many people are apparently looking for that very thing. That's not to say we always top out immediately, either - in fact, the most likely course of action seems to be a period of chop, where neither aggressive bullishness or bearishness tends to pay off.

Assuming we're heading into that type of environment, I still want to be a buyer when we see oversold conditions, but I also want to be more aggressive in selling when we become overbought.

With the chop of the past couple of days, our short-term indicators have relieved their oversold conditions and we even saw some hints of overbought earlier today. The last "buy" signal from these guides didn't lead to much at all after the gap up opening on Wednesday, so I've toned down my expectations here accordingly. We seem to be more at the mercy of Google's earnings than any technical setups, and gambling on that outcome is not my bag of tea. So I've backed off of trading positions and will wait until we get some better extremes that will hopefully give us a good trading setup.

As of:

SPX 1538

HELP ARCHIVE

It's been a meandering day, as the stock indices have tried to recover from the gap down open and lagging performance in the financials.

Over the past few days, we had gone over a number of potential positives for the short-term, but yesterday's gap up open kind of sucked the wind out of those sails and we've been flopping around ever since. Have I mentioned that that's why I hate large gap opens in the direction of my trade?

At this point, prices are still flat to down from when our short-term stuff first became oversold. This is not typical behavior during a strong uptrend, and it speaks to the loss of momentum we are apparently seeing. And when we get this kind of behavior in combination with the signs of excessive speculation and optimism we've gone over during the past week, I become much more skittish on the long side.

I don't think things look particularly bad on the long side here, when looking out over the next several sessions, but they don't see as good as they did a couple of days ago. I mentioned last week that the day following October option expirations has been positive every year for the past 10 years, which helps to highlight the sporadic bursts of positive seasonality we'll have through the end of the year.

We have this battle between seasonality, which is arguing for higher prices, and sentiment, which is suggesting choppy to down prices, so like I noted earlier I am still interested in trying to buy oversold conditions, but also more willing to sell into overbought ones. With some of our short-term gauges now cycling back to overbought, I'm pulling back further on trading positions. The reasons to get into the trade have dissipated without much market movement, and at this point we're relying on the unknown of Google's earnings more than anything else.

As of:

SPX 1550

HELP ARCHIVE

Good Thursday morning...we begin the day with a gap down opening (welcome to earnings season!). Financials are bearing the brunt of the selling pressure, which is pushing the BKX Banking Index close to it August lows - something we need to keep an eye on in terms of its implications for the broader indices.

Over the past couple of days, we've discussed a few things that pointed to higher prices in the short-term with good consistency. Like we see often during earnings season, however, we got a big gap opening yesterday and that changed the picture somewhat. As we went over then, the indices do not often act well after they see a large gap up, at least for the remainder of that day. That gap was something of a game-changer, yet by the close we were still seeing some readings that suggested higher prices in the near-term.

Longer-term, there are some worrisome issues, such as the numerous examples of excessive optimism that I've pointed out over the past week or so, and the fact that the market has reacted so poorly to the short-term oversold signals we got on Tuesday. A market that does not rally well off short-term oversold readings typically has longer-term problems, so that kind of loss of momentum - in combination with the readings of excessive optimism - are most definitely something we need to seriously consider.

About the only consistent positive factor I can uncover here is seasonality, which is positive on nearly every time frame heading right into the beginning of next year. Buying dips during the fourth quarter of almost any year and holding for at least a couple of weeks so has typically been a winning strategy.

It seems, then, that the most likely scenario is one I started writing about a couple of weeks ago, one of a much more choppy environment than the relatively steady trend we saw during September. The past week has reinforced that notion, though of course that has a lot to do with earnings and not necessarily sentiment or seasonality. If that is indeed the type of environment we've entered, then I still want to look to be a buyer when we reach oversold conditions, but it also means I want to be more aggressively selling when we rally.

For the short-term, I'm a bit torn here. Most of what we went over yesterday suggested that there was still a pretty good probability of seeing higher prices into expiration on Friday, but I am put off by our inability to hold any rally despite being somewhat oversold (according to the STEM.MR Model). So I'm going to just kind of sit back for now and see how traders react to the gap down.

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