Will the ECB Save Stocks?
The market pulled back Wednesday, a move we expected following Tuesday’s price action. The big tip off that a pullback was near came from the underperformance in bank stocks on Tuesday.
The banks led the indices higher on Monday following bailout rumors in Europe. In fact, most bank stocks were up over 3% on the session. But those same bank stocks, like MS BAC, C, and JPM could not hold those gains on Tuesday despite a huge rally in the other indices.
I was hoping to trade a pullback and take long positions on Wednesday. But in reviewing the charts, going long would have been too risky. The SPX needs to trade above 1175 in order for me to expect a rally to 1250. Since SPX closed at 1175 resistance on Tuesday, I needed to see a gain on Wednesday in order to generate a higher probability long signal.
And since the market tanked on Wednesday, instead of moving higher, I preferred to wait to enter until SPX gets back down to 1115. I think of 1175 as the fulcrum point for SPX and 1100 and 1250 as endpoints – so take a momentum trade as SPX crosses the fulcrum, or countertrend trade as SPX nears end points.
The nice thing about that strategy is it keeps us active in a sideways trending market. Additionally, we know that when SPX gives a sell signal, and we have open longs, we need to increase our stops.
That strategy has provided us with a few big winners this month (and in a very short time period) and it has also kept losers to digestible losses. And AONE (+14%) and SKF (+20%) are prime examples of how lucrative countertrend trading can be over short periods of time.
I have literally been in meetings all day, every day, this week, so I haven’t been following the news as closely as I normally do. But it looks like the same garbage; European debt crisis, tepid U.S. economic numbers and some dumb analyst telling you that gold is the only good investment.
The meetings are going well and I think there will be some new product features coming your way. I have also gotten the chance to sit down and speak more closely with our options guru, Andy Crowder.
Last week, he launched an options product, which utilizes options spreads to generate monthly income. It’s likely that he and I will also launch a new options product in January, but that will focus on basic puts and calls for directional trades. I can’t wait to start that service. And more information on his current service Options Advantage, which I recommend, can be found right here.
The market may begin to price in a rate cut in Europe. The ECB is widely expected to cut rates on October 6. I argued that they had no business raising rates a few months ago, in July. And in less than a year, and two rate hikes later, they’re already likely to reverse that strategy. The market would really like a 50 bps rate drop, but I’m thinking we see 25 bps and language that leaves another cut as a possibility.
Also, our company is having its annual corporate retreat this week. While I will be working normal business hours during that time, I will also be in lots of meetings. Accordingly, it may take me an extra few days to respond to subscriber email. The week should be very productive, and I hope to come away with new product features, and I sincerely do welcome your suggestions tradedesk@trademasterstocks.com. I still intend to make trades this week, but I also encourage you to watch the TWO weekend videos and follow those trade setups as well.
The bulls lost two key areas of long term support in a very short time last month. I think we are in the middle innings of a bear trend. In the near term, let’s watch price action near 1197 and 1250 closely. I do not think that buyers will regain 1250, and we should be looking to close longs, or initiate shorts in that area. Additionally, I think the door is open for the bears to break our long term support zone and move the market all the way down to 1050 at some point later this year. The bulls must hold 1175.
