Traders Kept Guessing, 82-Point Loss

Wednesday, April 22, 2009

The market closed on its lows of the day after a see-saw session kept traders guessing. The opening gap down reversal into positive territory was reminiscent of yesterday's action where stocks kept going and closed on their highs. Today saw similar action off the open but then choppy action ensued. The market rallied from down to up 70 points, failed at Friday's gap territory sliding back negative, then rallied again back to highs only to fail into the close for an 82-point loss for the day. Traders were well-advised to take their morning gains and run.

Yesterday's rally on the back of Timothy Geithner's comments shows just how headline-sensitive this market remains. The only way to make money in this market it seems is using technicals to indicate what other participants are doing. No one can say with any degree of accuracy whether the TARP, TLAF and/or PPIP will work. The government is fighting this recession with everything its got. We have seen massive domestic spending, interest rates cut to the minimum, unprecedented liquidity injections and billions in equity capital injections in banks. Will it all work? When will it work? How will we know? These questions are largely unanswered but there are a few things we do know.

We know that the S&P 500 is 26.5% off its bear market lows of 666. The bid to the market has been extremely strong and the market has yet to experience any substantial pullback to allow real money into equities. The financial sector has led the rally with an incredible bounce off extremely depressed levels and now sits 73.8% off the bear market lows. We are beginning to see the expected sector rotation but financials were able to rally farther than I had expected. The technology sector, represented by the XLK, has been a nice long since breaking out of its consolidation base with a buy at $16.20. The energy service sector, represented by the OIH, has yet to break out with conviction but is showing signs that it may come soon.

My speculation is that we have begun an extended pullback in the markets where real money will finally be able to join the rally. Friday's large gap down and bout of selling led to a 289-point fall signaling the short-term top in this rally. Markets bounced back yesterday indicating that this pull-in will have buyers and the short will not be easy. But, the double top at Friday's gap today confirms a definitive resistance level where shorts can now enter.


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