What to Make of Monday's Whipsaw Action

Even in the wake of CIT's massive bankruptcy filing, the equity markets managed to close the day higher with the S&P 500 gaining about .6% on the session.

What a Monday. The markets flew higher out of the gate, then rolled over hard later in the morning, only to rally into the close for marginal gains. All major indices closed below their session highs. The S&P 500 experienced a sharp rally after touching 1030, so we know this is a key support level to watch. In addition, the reversal from a session high of 1052 reinforces the 1050 range as a key resistance level. Keep in mind that we are dealing with 60-minute charts so these are short-term levels to watch. I have highlighted the key range to follow, also notice the coil forming on the RSI. I will be watching closely for a breakout.

 

 

The action is a bit more interesting on the daily charts. The S&P 500 broke above key resistance, the 50 day EMA and ascending price channel, only to roll over closing below these two resistance levels. Volume declined from the levels seen on Friday, but overall was fairly healthy.

On the NASDAQ, we pierced the lows from early October, before prices recovered above this key support. Take a look at the candle for Monday's session, we can see a great example of a long-legged Doji. This represents clear indecision on the part of traders, and when this type of candle is printed on a major support level, it is best to be on maximum alert for sharp price moves. Overall this correction is still in play however, the October lows have held firm. The leading market indices have shown initial signs of a bottom (NASDAQ and Transports). I am waiting for a definitive reversal on the 60-minute in prices to confirm my suspicions, but for now I think it would be unwise to initiate or add to short positions, the risk/return in the short-run is just not there. I am not turning bullish on the markets just yet, I still recommend a large cash position and extreme patience. Keep an eye on the 50 day Moving Averages, we may see a very tradable rally into the 1075 area in the coming weeks (read below section for explanation).

The third chart provides an update to the Head & Shoulders chart from my analysis last week: "...with that said, take a look at the chart. The pattern is more than 50% formed, and price/volume patterns are textbook. However, keep in mind that this pattern can fail, see June-July for a refresher. A couple of quick observations, notice how the recent peaks in price are rounded and appear to roll over, while the peaks over the summer are more jagged and spiked. The former indicates weak buying and a slow shift in the balance of power between the bulls and the bears, this signals weakness. The latter represents intense accumulation, convicted buyers, who in their haste drove prices up too far and too fast, this signals strength. Most importantly, the pattern must unfold as I have pointed out, for now it is even beyond mere speculation."

 

 

The Dollar Index continues to hold above 76. Even with the overall strength in equities today, the decline was quite minimal.

The Transports continue to remain extremely weak, declining .37% for the session. Prices momentarily broke support at the 200 day EMA, but recovered on very heavy volume. This action looks fairly bullish, but we will need to see some type of follow-through to confirm that today was a shakeout, and not a true breakdown.

 

 

As always, the long term trend. You can also Follow us on Twitter or Facebook, and sign up for our Portfolio Tilt updates by e-mail , delivered every morning.