Market Looks for Its Knight on A White Horse

It’s been about 5 weeks since my last post here.  During that time, I’ve been watching the deterioration of the stock market, and have made some money from calls on SDS, which double shorts the S&P 500.

The headlines on CNBC.com tell it all:   “Dow, S&P Log Worst Thanksgiving Week Since 1932″, “Gold Set for Second Weekly Loss, Technicals Weigh”, and “Asia Ends Lower on Europe Deadlock”.

Below is the current chart of the S&P 500.  You can see that it closed at its lows on “Black Friday”, an ironic coincidence.   You can also see that it has been down for 7 consecutive days, which is really quite rare.  This latest downturn bears a close resemblence to the one we had at the end of July.  That one went from 1350 to 1125, almost a 17% drop.  If the current decline is of a similar nature, that would bring us all the way down to about 1054! 

7 Consecutive Down Days!

 The technical damage is stunning.  The 200 day moving average proved to be sufficient resistance on the last rally, and we have now crashed down through the 50 day M.A. as well. 

Also, notice that the 50 day M.A., which had a tepid angle to it’s recent ascension, peaked after just 5 weeks, and has now begun to curve lower.  That is a real sign of weakness.
 
We also have not held support at the 1220 level, which a great many technicians had been saying was crucial.
 
So it all looks rather gruesome at the moment, especially given the fact that Thanksgiving week is historically one of the most bullish weeks of the year.  And the RSI and MACD are not even particularly oversold yet, meaning we could see another couple of days of drip, drip, drip, down, down, down.
 
So where is the knight in shining armor to come along and rescue the market?
 
Well, an interesting thing happened on Friday.  The European markets, which have been dragging the whole world lower, actually closed up on rumors of yet another bailout.  From CNBC.com:
 

European shares closed higher on Friday after EU officials said euro zone member states were discussing dropping private sector involvement from the permanent bailout mechanism, due to come into force in 2013.

So is this the best we’ve got?  At the moment, it would appear so.  And that’s not much to hang your hat on.

So what should investors do?  Is it time to go long yet?  Should we continue shorting, via Puts or long positions on Inverse ETF’s such as QID, SDS, or DOG?

Well, I think we could soon get a bullish bounce, but I also think it will be short lived.  So if you are currently long any positions, it may be best to hang in there, and sell after a few days of the bounce.  And that may also be a good time to take some new short positions.

I think it’s too late to begin shorting here, but too early to go long.   So we should probably wait for a better opportunity.  I know traders hate waiting, but by waiting we increase the probability of a greater return on our positions. 

So maybe this is the time to take your profits and get your Christmas shopping done! 

As usual, I will update you when I think the time is right to take our next positions.

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Saturday, November 26th, 2011 Educational

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