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November 24, 2008

Pivotal Point

It's late. There won't be any charts. I just want to lay out a few thoughts so they will incubate well while I sleep. Monday's session delivered on campaign promises as stocks rallied hard and the dollar tanked. The S&P 500 popped a healthy 6.5%. Silver was up a juicy 9%, and oil soared nearly five bucks. Despite my own portfolio's 6% gain, I felt negligently light on positions. Well, you know how it goes.

Anyway, where do we go now? Remember that the market has conditioned people to expect these sharp rallies off lows to fail quickly. So, one of two conditions exists at the moment. Case 1: weak hands used this rally to dump any remaining long positions. In this case, the market will leave them behind by continuing straight higher. Case 2: residual optimism has folks buying this rally. If this condition exists, the market will need a quick and scary fakeout move lower to shake off weak hands by making them think the rally is failing again.

Which condition exists? Hell if I know. The SPX managed to end the session right at the point of maximum confusion (once again) by closing on the crucial 850 pivot line. Volume also fell off today, but we shouldn't read too much into it since Thanksgiving week tends to show light volume in general. We would have also been hard-pressed to match Friday's opex volume. A fifteen percent, two day rally would seem to scream for some type of retreat, but this is exactly the condition that would keep weak hands on the sidelines if they were already out.

My plan is simple: wait for the first pullback... whether it occurs here or from higher levels... and judge its nature. If it takes a consolidative form, I will use it to bulk up on the long side. Impulsive, and I'll open the chutes and start dumping. The plan is simple enough. I'll keep you posted on how the execution goes.


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