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Wednesday, December 17, 2014

Daily update 12/7 - Buying panic

That was something. The upside volume was over 90% of the total volume.  That is a very rare thing to happen.  I have only seen that during very deeply oversold conditions and usually when some fundamentally good news happens.  The FED didn't actually do anything today.  In fact Yellen made the point in her press conference that changing the wording of the statement was not a policy change.  Does today's buying panic make any sense given nothing actually changed?  Here is the chart.

That is one funky looking chart.  Despite SPX being up 2% it still did not get above yesterday's high.  Breadth was a strong 86% positive.  There were 61 new highs and 109 new lows.  Notice anything odd with those numbers.  We gapped up this morning and major indexes never traded negative, but we still had more new lows then new highs.  This was clearly about buying the beat down stocks either for short covering or bargain hunting.  Lets see what the futures have to tell us.

We have a green price bar which closed slightly above the 18 SMA.  The market worked off the oversold condition in just one day.  We need a higher close to confirm the break of the 18 which could mean the pullback is over.  Lets take a look at IWM.

IWM broke out the bottom of the recent trading range and thrust back up inside it on an increase in volume.  A lot of the time a rejection like that leads to a break out the other way.  Is IWM going to test its recent highs now?  It did enough to change the short term trend back to neutral.

I am sure glad I did not try to predict what was going to happen today.  I am pretty sure I would not have even come close.  What happens now?  That is a very good question and I have no idea.  Here is what I do know.  I mentioned yesterday the close below the 100 DMA was a buy signal in all the recent pullbacks except the one in Oct.  It is entirely possible that pattern is so well know it contributed to today's buying pressure.  It is very probable that people were anxious to buy for the famed Santa rally that everybody knows is coming up.  That certainly has been publicized enough lately.  So we have historical reasons for the buying today.  Maybe with the FED not giving any hints of raising rates earlier then expected people took that as a green light to buy for the reasons mentioned.  In the 100 DMA buy pattern once SPX closed above the 50 DMA the index went on to new highs without ever looking back.  Since we closed above the 50 DMA today if the pattern is still working SPX should make a new high before closing back below the 50.

There are two things to watch out for.  Often times FED day moves are completely reversed in the next few days.  I don't know if that will be the case this time.  The more important thing is we don't know if selling was exhausted or not.  Yesterday afternoon the market sold off hard.  What stopped the selling was not price, but the fact the market closed.  It may be that the selling is over with, but we can't possibly know that yet.  A close below the 50 DMA would be different then what we have seen with the 100 DMA pattern.  That could be a sign the market is rolling back over.  In the mean time lets see what the bulls have.  One day does not make a trend so follow through is key.


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