Snapshot Notes - November 14, 2007

As of:

SPX 1490

By the time we closed out the day on a wild ride yesterday, there were a number of things that stood out, as is to be expected whenever we see such a sudden price movement.

I went over a couple of them yesterday, in relation to extreme one-day price moves in the S&P 500 and XBD Broker/Dealer Index. Last night and through this morning, I looked at yesterday's trading from a variety of angles, and most of them supported the previous conclusion of generally positive follow-through going forward, other than perhaps a day or two of consolidation.

There isn't much from today's trading that would distract from that message. By mid-morning, our short-term STEM.MR Model for the S&P 500 and Nasdaq 100 both curled down from overbought levels, suggesting one to three days of choppy to negative price action ahead. About the only time we don't see that is the initial thrust out of extreme oversold intermediate-term conditions, and it's debatable whether we reached that point a couple of days ago.

There were a relatively large number of our indicators that hit extremes on Monday, so suggesting that we became sufficiently oversold to expect a year-end rally from here is not out of the question. But the technical condition of indices like the S&P 500 is questionable, something we haven't seen for a long time. So I'm going to take it pretty conservatively in terms of intermediate-term positions, and see if the buyers are willing and able to step up again.

The best setup from both a short- and intermediate-term perspective would be a few days of consolidation or mild selling pressure, giving us a re-test of Monday's low. That's a very scripted setup, to be sure, but we've seen it time and again over the years and it's something I'd like to see again. So I probably won't be doing much on the long side until we get some kind of re-test, or the buyers show enough punch to get us over 1490 in the cash S&P index.

As of:

SPX 1490

HELP ARCHIVE

I don't have a lot to go over into the close, as it's been a pretty uneventful day in the major indices from the opening bell.

I mentioned this morning that I wouldn't dare expect to see two "gap and run" days in a row, and today fulfilled those expectations. In the meantime, our short-term STEM.MR Model for both the S&P 500 and the Nasdaq 100 gave technical "sell" signals today by cycling above their upper trading bands and curling back down, which typically means several days of choppy trading even in the best of circumstances.

About the only time the models do not consistently lead to that kind of choppy to negative performance in the indices is when we're first emerging from intermediate-term oversold conditions, and it's debatable whether that's the case now. If we continue to power higher in the days ahead, then the bulls will have that additional piece of confirmation.

While seasonality is OK good here, and there was a big confluence of oversold readings a couple of days ago, the technical condition of indices like the S&P 500 is precarious enough that I want to see some proof that buyers have enough oomph to keep us levitated.

For now, I'm pretty much flat and watching how things unfold from the sidelines. A decent argument can be made for either direction in the short-term, and I don't like to risk capital when that's the case.

As of:

SPX 1490

HELP ARCHIVE

Good Wednesday morning...we begin the day with yet another big gap up open indicated in the pre-market futures, with the major indices up between 0.5% and 1.5%. Yesterday's gap managed to hold and buyers built upon it despite the tendency for gap opens to "fade" after the open, so we'll see if they can manage it two days in a row.

Last week, I mentioned a stat from Jason Roney (via minyanville.com) that proved helpful in negotiating the large gap down open we were seeing then. This morning, I want to touch on one from Jon Markman, who noted that any time the S&P 500 rallied 2% or more in a single day in November, after losing at least 0.7% the day before, it was a very bearish development, with the S&P lower eight days later 11 out of 12 times by an average of -3%.

I re-created the study and didn't get quite the same results, but close enough. It's a curious thing, since I've looked at yesterday's trading a number of different ways and came up with mostly positive vibes.

I got similar numbers when looking at the decline of the past week prior to yesterday's rally, the recent breadth extremes, abrupt changes in sentiment, etc. We never have all the data in complete agreement - that's a fantasy land that just doesn't exist in trading - so we have to strive to make our best possible decision in the face of incomplete or conflicting data.

I find that when several seemingly solid studies point in opposite directions, then it's best for me to either stay out or reduce position sizes...but when we get those rarer instances of several different flavors of studies pointing in the same direction, then the reward tends to greatly outweigh the risk.

I'm intrigued enough by what Jon discovered that it throws some doubt on the more bullish views I'd looked at, and makes me want to be quicker to pull back on longs. Some of our shorter-term guides are stretching their upper limits, like the Price Oscillators, so that time may come fairly quickly.

That's especially the case when looking at another large gap up opening. I hate these things (except when I'm flat and looking to get into a position), and it seems like we have to deal with them two or three times every week nowadays. The large gap up open from yesterday managed to hold and turn into a trend day, but I wouldn't dare expect the same kind of gift two days in a row. I'm going to pull back, assuming the S&P 500 cash index is at 1490, and see how the gap gets treated.

Forwarding or otherwise distributing this copyrighted material is a breach of your subscriber agreement. Violators are subject to termination of their subscription with any received subscription fees forfeited. Any references to historical performance are based on data we deem to be reliable, but are based upon feeds from third parties. We do not recommend subscribers take positions based on data presented here alone, but rather incorporate it into a comprehensive investment outlook.