Finally - a predictable and rational market

There - I've said the "P" word - I've made the proclamation that the market is acting PREDICTABLY. Now I have to put a stake in the ground and make a prediction - and confidently back it up with a position. So here goes...consider this daily of the SPY:



Take a look at today's volume and the previous two volume spikes...all significant down days. The volume trend has been steadily declining since the spring while price action has been trending up. What does this mean? It means that the big, institutional money (mutual funds, pension funds, hedge funds, etc.) are sitting on the sidelines, unconvinced of the economic recovery. Biding their time with each passing week waiting to see some market fundamentals that would validate the "V" shaped recovery. But nada, zip, squat. No validation - just unbounded exuberance exhibited by the "small" money a.k.a. the retail investor.

Back in mid-July the market cracked the 50 day Moving Average but ultimately found support just below on the still down trending 200 day Moving Average. This event occurred not long after the 50MA crossed above the 200MA, which is often a time when the institutional investors start thinking "long". (BTW - the 50MA and 200MA are fundamental technical indicators that all the institutions use.) Not this time - again the big money stays on the sidelines. Volume continues to taper off until September 1 (the beginning of the traditional "correction month"). Bam! Big money steps in and drives the market back down below 100. We get support at around 99. The last time we had support at this level was mid-2004 where we tripled bottomed on a basing pattern. We got the anticipated bounce on virtually no volume and then saw 3 days of decent volume spikes (actually still below average for the SPY) on up moves. Followed by 3 flat days and then 3 down days - a wash. The next big volume spike comes on a big move down and is spread out over 2 days (9/30 and 10/1). Now the down trend in volume is broken and a prudent trader starts looking for an entry point - the big money is back in the game and they are going to move the market. Which way? Down!

Today's price action confirms (at least for me) that the institutional investors (who are the real market movers) are in and they are eating the lunch of the over exuberant retail investor. The SPY cracked its support at 103.85 and closed pretty much on its low. I believe we are seeing the formation of a Head and Shoulders pattern - the left shoulder and head are pretty obvious on this chart. My prediction? Next week the selling resumes and we move down to the 102 level. A bounce on low volume will take us back up to about 107...and then the bottom falls out and we head down to the 200 day Moving Average and the mid to low 90s.

I will go long as we are bouncing off of 102 (by selling SPY puts - probably the Dec09 100. The rise in price will cause these to bleed volatility and I'm happy to collect that - I'll buy them back when we get up to the 107 area. At that time I go short by purchasing deep in the money SPY puts that are a few months out - probably the Jan10 113. These babies are far enough in the future that they won't get hurt as much by the rising volatility created by the free falling market.

There - I've done it - a trifecta of "P" words - Proclamation, Prediction, Position. Now we wait and see.

Change is afoot

I have been sitting on the sidelines for quite sometime - mainly because the market's volatility indicators, in my opinion, cannot be trusted. With that as my prevailing attitude, I have not been able to bring myself to resume trading after the whupping I took last year. Today I see change afoot - let me explain starting with a picture:



Today's big body white candle represents a pretty significant upward move after a couple of down days. On the surface it looks like the continuation of the bull rally after after a couple of days of consolidation. The volume, however, tells a different story. Today's volume of just under 118M shares traded tells the real underlying story. The last time volume was at this level were on the days surrounding the last Christmas holiday. Prior to that it was Thanksgiving. Prior to that was May 30, 2008 - arguably the first summer weekend of the 2008. These lackluster levels demonstrate complete lack of interest by institutions and large scale traders. Let's wait and see what Tuesday brings...