The signs were there last night as I noted the market internals yesterday were ugly.  Well, today’s were uglier, down / up volume was almost 20:1 with 500 advancers to 2500 decliners.  Up until yesterday we were seeing up / down volume relatively balanced even on down days, pointing to the fact that buyers were stepping in all day to support prices.  This changed yesterday as we saw 6:1 selling to buying volume, and spilled over into today’s 20:1 collapse.  The last 10 minutes today were especially bad as the market really puked on big volume after the closing imbalances came in heavily sell side.  This tells me a few things, first off, sellers were waiting too see if a rebound rally emerged late in the day as it often has during this epic run.  Second, short sellers felt much more comfortable today holding onto their positions.  I’ve been joking that the shorts who refused to cover into strength have been left icing their balls more often than not, today was not the case.

The next few days now become very important as the sellers have a strong win under their belts.  Shorts thrive on momentum, selling begets selling, it’s now time for the dip buyers to step in if they still have the appetite.  The $SPY will test its 50 day moving average either today or Monday, that will be a monster level.  Take a glance at the chart of the SPY below.  The rising wedge patter of the rally since March was broken on strong volume today.  If you don’t think big players are looking at this you are kidding yourself.  At the end of the day charts are a visual representation of market psychology.  Market technicians don’t study chart patterns because they look pretty, we study and observe because the bars on the chart represent how the market feels, fear and greed represented by price, and more often than not these patterns which go back hundreds of years play out in the same manner.

Let’s get something straight though, this does not mean that it’s time to get bearish.  I’ll be very vocal when I believe the time to get short equities in size is upon us, I’m not one of those who chose to waffle around and hedge their statements.  Cash is a position, sometimes it’s better to sit and wait for the next move to reveal itself instead of flailing around trying to test the market for direction.

I will be on high alert for a tight range over the next two days.  If we churn above the 50 day moving average in a tight range tomorrow morning through the close on Monday it will be a very bullish signal.  Each time during this rally where the market has put in an intermediate term bottom we have seen two days of churn followed by a strong up day.

A few more important things I’m looking at.  The corporate bond ETF $LQD went ex dividend yesterday and opened weak, after which it continued to get crushed.  It ended the day down nearly 1.5% which is quite a wallop for a bond ETF.  The volume here was huge, almost three times average, someone wanted out.

The 20 day moving average had been trend support since the beginning of this rally, it was broken today.  I believe we are entering a period of consolidation, at best.

Material names led to the downside today with retail, staples, and healthcare finishing the day in decent shape.  The dollar had a strong day, but I see this as more of a reaction to the equity and bond weakness than a driver as the dollar has been lately.  I mentioned a few days ago that we were going to see the short dollar trade unwound a bit, I think we are almost through with that process.  Tests of 50 day moving averages by $EURUSD and and $USDCHF will be huge.

Treasuries, especially the 10 year are breaking out in a big way.  We’ve been seeing signs of this coming for a few weeks.  I got long on the first breakout in early September only to be whipped out.  It was a mistake not to take the second entry signal given on the 25th.

As I’ve become less bullish over the course of the past few days, not bearish though, I’ve shifted my book to a more even weighting.  Visa, Take Two, Jet Blue, Huntsman, and Skyworks on the long side were sold.  I’ve added Magna and LDK Solar shorts as targeted positions, not on an overall bearish bet on the market.

Everything automotive looks weak right now, it has been by far the weakest looking industry for a few months.  The charts and fundamentals are both bearish here, if the market takes a leg down this is somewhere you want to look for downside momentum.  Take a look at yesterday’s post for a little color on the $LDK short.

Today was important for sure, but not a reason to be bearish yet, it will take a break of 99.50 on the SPY to get mere there.  I’ll keep my book balanced and take note of a definite chill in the air.

I am loving my long book right now with great days out of HUN, JBLU, MBT, and GNA.  Dryships was a disappointment today to be honest, the volatility was sucked out of that stock as @stevenplace predicted.  I don’t mind some consolidation above the breakout level, it often provides a better base for which a longer rally can occur without a sharp pullback.  My lone short AMAG continues to move downward in a nice trend, but we aren’t seeing any kind of panic selling.  Frankly I don’t mind it, I have a short position that is making me money, how many other shorts are working that well in the market right now?

Take note briefly of the relative weakness in retail lately.  The RTH is under performing by a good margin over the last few weeks as we have seen crazy strength in many of the material names.  Be cognizant of the demand destruction trade taking place over the next few months if materials and energy continue to fly.

Someone bought a hell of a lot of corn today, along with many of the other grains and agricultural futures.  Either that or there was a was some panic short covering going on.  December corn traded over 200,000 contracts, that’s more than three times the average for the last three months. Corn closed up 9% on the day at the highs and now sits just below 350. That number happens to be important as it’s the panic low from last December.  I won’t pretend to know anything about the fundamentals of corn, so I won’t go there.  As well, I’m not a value investor, I don’t pick bottoms, and I’m not interested in buying something because it looks cheap based on whatever method of valuation you want to use.  What is interesting here is the sheer velocity in the movement today and what that might signal in terms leading to some momentum to the upside.  A break through 375 would give a pretty good buy signal.  I don’t trade straight corn futures, but I do trade the agriculture stocks, and right now I’m long CF Industries.  Oh how the mighty have fallen in this space since last year’s dizzying run, but man can these things go in a hurry if their underlying commodities get off the mat.

Game two of the hockey season tonight, and only 18 days until the real guys hit the ice for opening night.  I love fall in New York.

]]> http://www.leighdrogen.com/be-a-loonie-postmarket-update-91509/feed/ 0