I have spent a lot of time trading the financials for the past 18 months.  Maybe too much time 🙂  Yesterday,  when many traded to key support levels I got long.  Some broke these levels briefly so I got out and even got short some MS.  Not such a good idea.  Every single financial closed significantly above their support levels and have rallied strongly today.

The market is not going to trade below 87 on the SPYs unless these financials break down.  There was relatively little commitment to sell them at their key support levels: GS (135), WFC(22), MS(25), JPM(32), and STT(44) all seem to want to trade higher.  As I mentioned in my last blog most of the trading world is focused on the “head and shoulders” pattern of the SPYs.  They were just chomping at the bit for a break to the downside.  It just didn’t happen.

I am mentally prepared for each of these financials to retrace a minimum of 50% of the recent down moves and if the market responds favorably to their earnings’ reports they will trade to their highs.  The only thing that will get me to change my bias on the sector at this point is a move through key support levels on heavy volume.

It is important to differentiate between an awful macro economic picture and the price action in the stock market.  These two things don’t necessarily move in lock and step with one another.  A huge part of the price action in the market is dictated by supply/demand.  The reality is that there is literally still trillions of dollars on the sidelines.  Also, there are probably a lot of large funds that need to put money to work soon in anticipation of a 2010 economic recovery.  There may not be another huge down move in the market until it becomes clear that recovery isn’t coming till 2012…

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