Breakfast with Brodsky
Get ready for me....
Good morning. Yesterday's market action acted in the same manner as the previous two-day's trading. Fading each move has been the only successful trade in this up and down tape and although it appears that we are trying to put in a bottom at the 1090 level in the S&P, looks can be deceiving.
The most interesting aspect of the current marketplace is people's opinions as to where we are heading. I have found that most people are in agreement on the following ideas: 1) we will hit 1060 on the S&P and bounce 2) we are going lower in the near term yet no one wants to miss the possibility of a rally and therefore has zero conviction on the long or short side and 3) we will be higher in a few months.
I have certainly offered some of those ideas up within my missives over the past few weeks, as this market has been bi-polar. Each day has brought us gap up's and gap down's and the only profitable move has been to fade the gaps. While this can be profitable for day-traders and trading in small quantities, managing a portfolio and having conviction during these times is extraordinarily trying.
The aforementioned list of "agreed" upon ideas (I put agreed in quotes because the people I speak with agree with the three points although you may not) illustrates my concern about the market's near term health. We all know the adage that says sheep follow the herd, and sheep get slaughtered. So if a majority of publications, people's attitudes and current investment thesis is based on those ideas wouldn't one have to think that it is too easy to let the market play out like that? I do.
Does that mean I have the slightest idea about where we are headed or if and when the market will turn? No and believe me I wish I did. The one thing I can take away from the growing majority of people that believe in the magical 1060 number is that there is a rising possibility it won't be the critical level where we will touch and then return to the up trend. History almost guarantees it.
The bottom line to me is that unless you have serious conviction and an unbelievable edge it may be better to let this market trade out. Yes things are oversold, yes the S&P's RSI is beaten down and there is a divergence forming where we could rally, yes the NDX is not breaking its 200-day and its RSI is forming a divergence as well. All of these things add up to a market where the risk/reward is growing on the long side and the magic number to break above is 1104 in the S&P and be able to hold.
We saw technology, mainly the semis lead continuously throughout the day and this is a good sign. After a painful year where the semis have led us lower more often than higher, it was an interesting divergence (yes I keep using the word divergence because in this wild market we need to look for them to give us insight into the next move.) The real test will come today with the futures bid up and yesterday's failed market. The move has been to fade every rally and my gut is telling me this pattern could abate soon. Good luck.
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