Stock Market Stuck in the Gap...
Stock-Markets / Stock Index Trading Sep 23, 2009 - 03:03 AM GMTBy: Jack_Steiman
We made a nice move a few days back to get through the bottom of that 1060 to 1080 gap on the S&P 500. We are hanging out above 1060 but are unable to this point to take out 1080 thus we're literally stuck in the gap. A tough place to get much volatility.
The bears fighting hard to prevent 1080 plus and the bulls fighting hard to prevent 1060 and lower. The problem here is the actual size of this gap. It was a gap down from 1080 to 1060 and that's a 2% gap on the S&P and that's very unusual. When a gap is that large, you normally see automatic computer programs hit long ago set up.
Those orders are sell orders that the bulls are trying to overcome. They're doing a good job just hanging in there. The buy side on this market is so intense you can see why the gap is actually not spitting the bulls right back down. That should have happened at 1060 but didn't.
While we trade in this gap, expect loads of whipsaw on your stocks. We will get a break, of course, but you need to see which way it breaks to get more excited about being in heavier. These gaps can make trading quite boring overall as things tighten up. Little movement unless, of course, you're playing those froth stocks which once again taught a nasty lesson today. More on that later.
Just understand that we're trading in an unusually larger gap that came about on very high volume thus it won't be a walk in the park for the bulls to just blast through. It could just as easily fail short term as it could succeed. See the move and then adjust accordingly. Don't anticipate it, please. That often leads to some great pain. It can also give you the best feeling of all being ahead of the move and not having to chase some, but understand and recognize the risk involved. It can be bigger and more painful than you'd care to think possible.
So let’s talk about the lesson regarding froth. It's very sexy to get involved with stocks that are just blasting around, trying to make the big score, the quick score. You watch a stock going wild and the temptation is to get involved. Greed is a very intense emotion. Despair more so. We often ignore the prospects of despair because the greed seems logical to us. I mean after all, things just keep going up don't they? And if that's so, why shouldn't I get involved!
I avoid these stocks like the plague because I know the damage these plays can bring. Let's pay attention to American International Group, Inc. (AIG). It gaps up today after yesterday's big up day. We're told on these fast money shows that all these options are out there at higher prices and thus the likelihood is for higher prices. We hear this and think, oh yes, I want to be a part of that. The stock gaps up today. People chase it. It goes to 54+. It closed at 45+. A $9 reversal. OUCH!!!!! Froth is good, until it isn't. The damage? Severe! This game is too tough.
You can't waste time, in my world anyway, thinking about getting rich. This game is for making a few dollars the appropriate way. When playing normally you can take some losses. Look at Diodes Inc. (DIOD). Out of nowhere it breaks a trend line after acting perfectly and setting up so well. We have a very high win percentage but that's only because we always avoid froth. You can't hit 100% or even near it playing the right way. Why waste time playing the froth that's out there. When it ends, it'll end badly. Don't get caught in it by getting involved.
The banks led big time today and what can you say other than we need the financial stocks to get this market over 1080 on the S&P. A lot of big heavyweights exist in that sector and it can easily lead the markets higher. Strong gains for sure there today on solid internals that say they can go higher still. Now we do have the fed meeting concluding tomorrow at 2:15 Eastern Time and this could have a huge effect on those particular stocks depending on his actions and statement.
If he's favorable to that sector, can a breakout over 1080 be far away? No, but we don't know what he's going to say or do, and the market will be listening with both ears to hear if he even hints at a rate hike after having them so low for so long. The market, for now, would prefer borrowing to be as easy as humanly possible thus no hints at a rate hike would be preferable. Maybe the fed wants the market higher and will give those financial stocks the ammunition they need. Tomorrow won't lack for being interesting. The financials and their reaction will be watched very closely.
Major support on the S&P is at 1040 or the 20-day exponential moving average. We also know that since we're above 1060, you could throw that in to the mix as well but 1040 is more important, bigger picture. 1018 is the line in the sand for the bulls as this gap is now super support. 1080 is the key to the upside and if that clears, 1125 is a real possibility. We remain overbought thus a pullback of some consequence can occur at any moment.
Be on guard and don't get complacent.
Day at a time with tomorrow post fed speaking loudly.
Peace
Jack Steiman
Jack Steiman is author of SwingTradeOnline.com ( www.swingtradeonline.com ). Former columnist for TheStreet.com, Jack is renowned for calling major shifts in the market, including the market bottom in mid-2002 and the market top in October 2007.
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