OK so we are in a recession. And there is no end is sight. What caused this whole mess? The housing crisis. I will not pretend that I understand this crisis as well as some on our desk. And I don’t really need to as a trader. I need to know what moves the market. And anything that may fix, or may lessen the impact of the housing crisis will move the market. OK so I understand that part. Now let’s talk about trading with this info.

We have all these fancy news feed. We have a guy piped in who reads all the important news wire stories. We have briefing. We have CNBC. Sometimes a new trader asks why we don’t have a certain news feed. First I roll my eyes. Then I chuckle. Then I say to myself, “this one is gonna be trouble.” And I tell him because we have what we need. But I do all that other stuff first. And we do.

On a related topic let’s discuss air conditioning. We trade in a very large office and the AC gets tricky at times. Yesterday the AC wasn’t on because IT’S THE MIDDLE OF THE WINTER and it got a little hot at the end of the day. And traders were chirping. Like we had AC “back in the day.” When it got too hot ice cream sandwiches were brought in. You got a cold drink and traded. Freakin new traders.

I noticed something today that I couldn’t read on any of these news feeds. SPY was making new lows in the afternoon. Most stocks were following SPY lower. The market was in an intraday downtrend. There were no catalysts for a bounce. There was just selling and selling and selling.

And then I started to notice something unusual. It wasn’t just me it was our desk. Dov started chirping to Steve about how SPY could not trade below 81.10. I chirped that GS was very strong near 92. GS was stronger than IBM. Strange. AET could not trade below 32 thought the market was consistently making new lows. Why were these stocks so strong yet the market so weak?

When the market is as weak as it was in the afternoon today you should look for weak stocks to short. But you should also pay attention to market leaders. You ought to watch GS, USO, IBM, AAPL, etc and get a feel for their strength. Like a hawk you ought to notice if SPY stops making new lows. When the market bounces these are the first stocks and ETF’s to be bought. Often before the market bounces these stocks foreshadow the bounce. They just don’t go down, while the market is making new lows.

And I saw some of this before the bounce. I saw this in GS. I saw this in AET and started a small long position near 32. I listened to Dov and Steve talk about the 81.10 SPY level. SPY showed bids below 81.10, allowing some more to get short, and then popped. SPY popped 70c. News?

At first when the news came out about the government plan to help with foreclosures the market did not react. But we all had this news. We all should have had this in the back of our minds. And then when SPY popped we should have made things simple. If SPY held at these much higher levels and then started another up leg, it was time to start looking for some longs. And that is what happened.

You didn’t actually need to know the news. The market told you it was going to bounce. It popped, held higher, then started another up leg. Game on.

The financials will bounce the best with news such as the above. And GS was the best of them. Offers were cleared for 50c multiple times. Those that trade GS know that is rare to see offers cleared for 50c. Usually one program tries to beat another, which tries to beat another, and GS moves up and down seemingly arbitrarily in a tight range. There was heavy resistance finally at 94.20 in GS, but that level was breached eventually.

This market is not going anywhere for awhile. There is still so much uncertainty. Next there might be whispers that the government plan is not enough, or that it doesn’t have support. And the market might tank. Tomorrow may be a day where the bulls take stocks higher until these whispers commence. The toxic asset mess is far from resolved. The housing crisis is not near the end. And as such our market will be interesting.

Another great day to be a trader. Another huge opportunity presented by the market. And tomorrow will be another great trading day.

Best of luck with your trading.