Today I saw strong evidence that the recent market rally has come to an end. Today was the 28th trading day since the Reversal Day which established the five week run we have seen in the market. I like to jokingly refer to the rally as the “Obama rally” as the constant bashing of Obama on CNBC seemed to coincide with the bottom being put in place.
During our AM Meeting we discussed the possibility of today being a Reversal/Trend Day. If the market were to make a meager attempt at rallying on the Open and trade below 85.20 then we would trade today with a short bias and expect a trend day. On a trend day you constantly look for good entry points with the DIRECTION of the market’s trend! You should not attempt to FADE the market!
The market made no attempt to rally on the Open and quickly traded below 85.20. The financials which had recently led the market higher were all very weak during the first 90 minutes (with the exception of GS). Things got pretty ugly out there. There was vicious selling into the close in the financials. Most of them closed at or near recent support levels.
If this is the beginning of a correction in the market there will be plenty of money to be made on the short side. I would recommend being patient tomorrow to look for the best entry points. Ideally we will rally a little bit on the Open to yesterday afternoon’s resistance area which would provide excellent entry points on the short side (SPYs 84-84.40). If we trade below today’s low then look for an initial move to 82.65 on the SPYs. If we get taken to the woodshed then 81.50 would be the next support level.
If the market rallies tomorrow and closes above 85.20 then this would provide evidence that today wasn’t a Reversal Day and the uptrend could continue to 92-93 on the SPYs. This seems less likely than a correction which should take the SPYs to 78 fairly quickly.
In terms of individual stocks I will look at shorting BAC at 8.50-8.57, WFC 17.60, MS 24, GS 117.20, JPM 30.40-30.60 and the IYF at 36.80.
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