Market Direction: Another Gap Open

Market direction continues to plague investors. Today saw another market gap open and than as the day wore on the entire rally was wiped out. Then the market went negative. Late in the day the bulls got together and pushed the market back into positive territory. This is only going to happen so many times before the buyers move to lower valuations.

I read an interesting article on market direction over on seeking alpha by Bespoke Investment Group where they discussed what they termed all or nothing days in the market. Volatility is going to be with the market for a while longer I believe.

Below is the S&P 500 one day chart for September 29 2011. The gap open is obvious and I don’t think I need to keep reminding everyone that gap opens are signs of bear markets. Surely by now investors know this is a bear market and normally the overall market direction is lower.

After the Gap open the market pulled back to test the Gap and then promptly fell right through it. Late in the day came the inevitable recovery but not to the highs of the early morning.

Market Direction S&P500 chart for Sept 29 2011

Market Direction – Lots Of SPY Put Activity today

Today’s market action was excellent for my SPY Put hedge and I was in the SPY Puts twice during the day. To me, the market direction is a confirmed down. Since I am confident in my market direction call, I have no trouble buying SPY puts when the market rises.

It’s a pretty simple trade using the Ultimate Oscillator.

I am working on another article following today’s SPY Put trades to show how I can often improve my SPY put trade through switching between the 1 minute and 5 minute time frames. I hope to have the article up this weekend.

Market Direction – No Change – Still Down

The market direction has no change. I still believe the market will head lower and I think the S&P could retrace to the 1000 level. At that point it will be time to assess if the market can hold and build a new base to rally into the year-end.

The NASDAQ which lead most this bull market since March 2009, is flashing sell signals and warnings. Today was another good example as the NASDAQ closed down. But that isn’t the most troubling bit of news. It is the fact that while the Dow and the S&P are trying for a market direction change, the NASDAQ is not confirming any rebound in stocks.

Market Direction - Nasdaq Not Confirming Any Rebound

As with all such market direction guesses, they are just that, a best guess. However when you look at the chart below, you have to wonder if this market can pick itself up and push and stay higher. Since the August collapse, each recovery has seen a lower high and volumes are declining in each rally back.

This usually means that the market will eventually break to the downside as buyers are moving to the sidelines and selling on every rally. In the last few sessions the buying and selling is now occurring in the same day. This means that investors are becoming traders and each pullback is being met with less buyers.

This is okay as long as volume stays low, but if the market gets a larger volume day with more sellers, it will push the market lower. If the August 9 lows break, which I think they will, then the market has limited support until around the 1000 level on the S&P.

Market Direction Sept 29 2011 Lower Highs

Market Direction Summary – Jan 29 2011 – Be Careful

All these gap opens and inability of the markets to break higher, let along hang onto their intraday rallies is very troubling. This can only go on for so long and then the market will fall lower. It has to in order to regroup and establish a new stronger base. It will keep pounding at the August 9 low, but every pullback means more and more investors grow wearisome and start to take money off the table. This will eventually break support and find the market direction a confirmed down.

Be wary of all the talking heads who are preaching cheap stocks and low PEs. Remember that if a recession is in the works or perhaps we never got out of one in the first place, then earnings will pull back for most stocks, leading to lower overall price valuations.

Analysts follow specific sectors and/or specific stocks. Their world is small in relation to the global world and they do not follow a wide number of indicators. Anyone who believes US Financials are a buy is bound to get into trouble. As well any analysts who believe that European woes will have no effect over here in North America are not well grounded.

Be careful in this environment. I plan to stay consistent and whether the market direction is a confirmed down or up, I will be staying with protective strategies for the foreseeable future. I aim for my small monthly 1% gains in my whole portfolio and do my best to write puts far enough out of the money to bring in the income but without worrying about being assigned shares at higher prices.

I never mind if my market direction call is wrong. In fact I look forward to the market direction changing for the better, but I am a realist and this market looks like it is hanging by a thread.