Well, if you thought Friday was boring like I did, then Monday was anything but. With a large gap down, I kept waiting for at least some semblance of a rebound to put on some shorts but it turns out, other than a relatively slight bounce into the 11:00 hour, that was about it. The rest of the day the market chopped around below the 800 level though it did try a little rally into 3:30 which would have been rewarded on the short side if you weren’t particularly ambitious. I spent most the day watching and being glad to at least have some silver and gold plays, obviously not enough, which were the only commodity stocks positive. The net result was a really ugly day with most the major indexes down about 4% on average. The BKX was especially hit hard with the brokers taking a big hit led by GS. I remarked to someone that the BKX would need to nearly double just to get back up to its horizontal resistance line around 47.
Obviously we have definitely broken our recent up trend line and generally strong support into the low 800 area for the S&P. Though somewhat oversold after today, we’re not at extremes yet though the DOW did close right on a prior low and has at least a little support here, but in this market, who can say how much.
I think our best bet would be if we could get some more selling early this am and then see if we could set up for some short term bounce from there. According to Jason Goepfert at the well respected Sentiment Trader “If SPY gapped upthe next morning, buying that open and holding for two days resulted in 3 winning trades out of the 8 attempts, with an average return of -1.1%. The average drawdown was equal to the average maximum gain at 4.4%. The average drawdown THAT DAY was -3.3% with all but one suffering at least a -2% drop at some point during the day.
Now for the other side…if SPY gapped down the next morning, buying that open and holding for two days resulted in all 6 winners, with an average return of +5.4%. The average drawdown during the trade was -2.6% versus an average maximum gain of +8.1%.” So that’s what I’m hoping for since for now the former support we had in the low 800 level will probably act as resistance, plus we’ll now have gap resistance at the 820 level. I think the primary thing for everyone to remember is patience.