Market Continues to Exhibit Bi-Polar Behavior with Today's Mega Rally

3/03/2011 11:24:00 PM / Posted by Soullfire / comments (0)

This week is a classic example of the market's bipolar behavior. The market rallies on Monday, has its worst day of the year on Tuesday, then follows it up with its best day of the year with a gap up rally near 200 points today.

Even though oil is hovering around $102, the market chose instead to embrace the positive news in reduced number of unemployment claims filed. Such is the life of a market that likes to ignore bad news until it decides otherwise, and then panics about it. 

Today's market activity was interesting in that there was plenty of "grinding action" in the move up, and by that I mean it's when a stock continually moves upward in small increments with little to no pullbacks.

Here's an example of a stock with grinding up activity today - Priceline:


With a stock with this kind of price movement, you can get in at just about any time of day and be assured of making money. Any one foolish enough to try shorting this stock would have the odds heavily stacked against them.

My guess to the causes of this kind of grinding activity is likely due to the trading computers interacting with each other inching the market up slowly but surely.

The thing is though, this action doesn't portray normal market behavior, and because of that falls under my "highly suspect" radar. I don't like to jump in on any stock trading this way since if the pattern fails, the stock tends to drop rapidly- and you never know if/when it will fail. 

So that brings us to the market rally today- does this mean Tuesday's major sell off was just a fluke and its onward and upward from here?

My opinion is as follows.

The "old Soullfire" would have complained that the market has no business rallying with $100+ oil, continued high unemployment, falling home prices, and increasing signs of inflation. My new thought process disregards all that stuff in the short term and just focuses on trends.

The equity market indices (Dow Jones, Nasdaq, S&P 500) all have long term up trends but are trending lower on the shorter time frame. I think the market is more likely to trend lower then break out and make new multi year highs because we haven't completed the move down to warrant support of the longer term trend yet.

I view today's rally and accompanying "grinding action" as an effort to kill any shorts who jumped on board during or after Tuesday's big sell off. The market in general loves to knock people out of positions to reduce the number of people making profits. This is why market analysis is both a science and art when it comes to interpreting its behavior.

The market gave a warning signal with Tuesday's sell off, which today's rally should not make you inclined to forget. The key is to keep an eye on the long term trend and be ready to act if that trend breaks down if you have long term positions. 

In terms of timing, I think this would be a perfect time for the market to sell off, since the political campaigns will be kicking off a few months from now for the Presidential election next year. The administration in power does their best to keep the markets stable so it won't be used as a political issue against them. If the market sells off in the near future, there's enough time for it to recover later in the year when the election cycle starts heating up. Otherwise, we're looking at a market that has gone up almost in a straight line since March '09 to continue through 2012. Logic dictates that the market eventually has to "exhale" sometime. The longer the market moves up without any corrections, the greater the risk of a bigger correction/sell-off down the line.

Now, market behavior has been hijacked with the Fed continually pumping money into the system, which explains the one sided behavior, but even the Fed has its limits in how much it can control the markets - the free fall of 2008 is a clear example of that. 

The Non Farm Payrolls (Jobs Report) number is released on Friday, and all are expecting a rally if the numbers are good. We are nearing the upper range of the short term down trend, so the market can either break out of that trend and reverse to resume its upward movement, or resume its downward move.

I suspect the market will interpret the news as good no matter what the actual numbers are, and rally hard in the morning, followed by a slow pullback throughout the day. This will entice many Bulls to jump in at the open,...only to see their positions going down at the end of the day.

The other possible alternative is a seriously bad number resulting in a gap down and all day sell off, which will shock all the Bulls that jumped in positions today.

I think this short term downtrend will be pushed and tested, but will hold and not break at this time - we will see....


In trading news, I still have open short positions in AMZN and WLT. AMZN is trending down, but WLT is looking like it's going to break out of its longer term downtrend. If WLT does break out, I'll have to start closing my positions for a loss, but I'm not convinced yet...its movement has been way too strong- too encouraging for Bulls to jump on board in a seemingly "risk-free" move.

I had a short with CME, and intended to keep it overnight but lost track of my stop, and sure enough got stopped out at a loss. The market moved high enough to trigger it, and then reversed. This is why people have a love/hate relationship with stops - they save your neck from catastrophic loss, but are vulnerable to market whipsaws. Of course to add insult to injury, CME closed at a price that would have been profitable if I were still in that position.

I also bought back a March 135 put I sold on CF on Tuesday's down draft for a profit which mitigated the loss in CME. I was planning to hold onto the put, but decided to wait since I'm a bit worried about the market selling off and taking CF with it. 

Since I'm blogging more about my trading these days, I decided to revive my trading blog - which I'll start using more often.