False Breakdown #1

I warned about the potential for a false breakdown from the widely advertised H&S pattern on the SPX. The market is ST oversold and still has a chance to make a little bounce but the NASDAQ/NYSE ratio is still at a high 1.88 indicating that any rally attempt here likey will be limited for now unless of course traders do an about face. However, there's plenty of ST fuel for a move back to 900. There's also an unfilled gap at 920. Like I said before, if this is the begining of another major downleg, don't expect it to be easy to profit from.

One thing the bulls got going for them is the VIX. I made a post about a week ago claiming how the behavior in the VIX was signalling complacency by making lower lows as the market made lower highs. This behavior is no longer the case. Today we saw a bit of the opposite behavior whereby the VIX popped signficantly even though the marke was only showing moderate weakness at best and it remained in the green even though the market closed essentially flat.

Bottom line: look for the market to make a rally attempt in the comming days to about 900...but be very careful. I think a lot of people now are expecting a bounce tommorow so it may end up being a weak one followed by a another retest of the lows on Friday. Again, this is guesswork here because obviously headline risk will have an impact and one must adapt accordingly. I always keep an eye on the intraday put/call ratio to fine tune my intraday outlook as well.

I continue to stress that the key to success in this type of market is buying on weakness selling on strength especially at those points when it seems difficult to do so. The tough trade is usually the right trade. I tend to either wait for some sort of confirmation of a turning point or capitulatory type behavior when making my entries. For example, today I bought calls on CYOU at about 12pm on the double bottom. I sold them shortly after for a quick gain anticipating a turnaround in the market. Part of the reason I sold so soon was that it didn't pop as much as I thought it would given it's strong relative strength since it IPOed a few months ago. The other reason was that given how these were OTM calls with 8 trading days untill expiry the theta burn is quite high and so if the pop in the stock ended up fizzling by EOD, any moderate gap down the next day would result in the call getting crushed without giving me a chance to cut losses effectivily thereby putting me in the a "dear in the headlights" position. I REFUSE to be in such a position and with earnings season kicking off, it makes the market more prone to significant gaps.

Regarding yesterday's mystery chart for anyone who cares (seems like nobody) here's what ended up happening...



Where you suprised? This was the market in 2003 by the way....