Stop, Drop and Roll!
If they're moving "civilians" out of Iraq, what does that say?
How do you shoot the devil in the back? What if you miss?
--Verbal Kint, Usual Suspects
Well, my friends, here we are--Freaky Friday. With yesterday's jiggy action still on the lips of traders, we power up our systems to find green seas anew. Europe is doing it's part (for a change) and the bourses have put together their best back-to-back sessions since '98. Away from the pump, the oil spill continues to drip and crude is now flirting with $30 a barrel. Will the Minx offer an upside encore and complete finish the show with a bang? Take a walk with me, Minyans, and let's try to make sense of it all.
First things first, a little perspective. The German DAX, which I like to watch as a proxy for Europe, has, in fact, rallied smartly in the last two sessions. It is interesting to note, however, that the bourse is still DOWN on the week and waffling under our much discussed breakdown levels. I was a bit surprised when I stumbled onto this fact and while it's overseas brethren have (thus far) notched some gains, they're playing ketchup for the most part.
I point this out for no other reason that to offer perspective. It's very easy to get sucked into the Minxy emotional maelstrom and sometimes it helps to look at the picture from a different vantage point. The only thing that's discernibly shifted in the last few sessions is psychology and while that's (obviously) a powerful metric, we can't lose sight of the underlying crosscurrents. My concern is that as the war trade is unwound on the perception of unity/avoidance, the downside risk increases in kind.
I'm operating under the assumption that this rally is a counter-trend move predicated on hope (rather than change) and I've been gingerly scaling into some April puts. I'm well aware that IF (big if) we manage to "justify" the rally via an accord (into next week), the perception (and therefore the temporary reality) will view Wednesday's reversal as THE turning point and spur more buying. That's why I've chosen to define my overnight risk (via options) and day trading risk with stops.
Yesterday's spike took the S&P towards the January downtrend line and that'll provide the first area of resistance. Beyond that, there's further areas of contention at S&P 853 and S&P 870. Downside support will come into play at S&P 820 (former resistance), S&P 810 (gap opening) and S&P 800. For the techs, THE downtrend line rests around NDX 1050ish and that's THE level to watch on the upside. Support will come into play around NDX 1020 and NDX 990. The banks also deserve a mention as it spiked back to the breakdown level at BKX 700 (resistance). Through there, BKX 725 is the next zone.
I walked to work with complete humility and two legs in my metaphorical bear costume (50% conviction on the short side). We've documented the risks (both ways) and my belief (false rally) but I know enough to know that we're all just pawns in this game. It's alright to have a view but entirely more important to defer to an ultimate discipline. In that vein, I've been debating "stop levels" in my mind and, as of now, I'm eyeing NDX 1055 and S&P 855.
I must (once again) repeat that I offer my insights with educational intentions and by no means is it meant as "advice." My goal is to provide the "hows" and "whys" of the market such that Minyans can make better decisions for themselves. Each of you has a unique risk profile and, as such, you've got to make decisions consistent with your needs. I can only offer my honest assessment--right or wrong--with the hopes that it adds value at some level.
We've got one more session before our (much deserved) requisite respite so lets get this party started right. Keep an eye out for industrial production (exp. 0) and capacity utilization (exp. 75.6%) at 9:15 and the University of Michigan Confidence report (exp. 78) at 10:00. And remember to think positive, Minyans--it all starts within.
Kick some arse!
Todd Harrison is the founder and Chief Executive Officer of Minyanville. Prior to his current role, Mr. Harrison was President and head trader at a $400 million dollar New York-based hedge fund. Todd welcomes your comments and/or feedback at firstname.lastname@example.org.
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