The Trader Daily

 | Apr 11, 2014 | 7:00 AM EDT  | Comments
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Stock quotes in this article:

spy

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QQQ

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DIA

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IWN

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jwn

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gm

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c

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twtr

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gs

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gs

"Everybody panic! It's just like the Titanic, but it's full of bears!" -- Will Ferrell

Sometime you're the hammer and sometimes you're the nail. Despite Wednesday's post FOMC minutes rally, the bulls were most certainly the nail during Thursday's horrendous session.

Shortly after Thursday's close, Mike Norman asked in Columnist Conversation what all the panic was about. He suggested that the current decline was nothing but another buying opportunity. In my view, whether or not a decline in price is a buying opportunity is entirely dependent upon one's timeframe. This made me wonder whether folks were failing to considered that any such change (in the overall market) could have been occurring over the past four, five or even six weeks and not over the past two or three days.

Major market shifts generally don't take place over 24 or 48 hours. They occur over weeks and months. Like the frog, perhaps the majority of (short-term) investors had failed to recognize and gauge the market's changing temperature. And once the water began to boil and prices began to slide, investors got scared and tried to escape.

One's degree of panic is generally correlated to one's own unique timeframe. If one is bullish, over-leveraged and operating within a very short-term timeframe, then it's not surprising that Thursday's slide might induce a bit of heartburn. If one is looking out over an entire business cycle, then I doubt a 3%, 5% or even 8% slide from all-time highs would be interpreted as n catastrophe.

This brings up another important issue. When you listen to a commentator on CNBC, read the thoughts of an investor or trader on the pages of Real Money or discuss trading strategy with another participant, be sure you understand what their timeframe is. Prognostications, regardless of how famous those giving them are or how much you respect them, are unlikely to be of great value if you're unclear of their specific timeframe. Context and timeframe are two of the most-important, and least-understood factors of trading and investing. Glossing over these two concepts will cost you dearly.

Getting back to the market, let's review what we currently know.

As you'll recall, we've been highlighting the fact that the Nasdaq and Russell are trapped within short-term downtrends. But their long-term uptrends are still very much intact. And as far as the S&P 500 and Dow are concerned, the SPY finally closed beneath it's composite balance and 50-day moving average, while the DIA is still trading within its 160.50-165 balance zone.

Despite the impressive point movements over the past two session, the chart below of our four primary index ETFs shows relatively little change. The QQQ and IWM are still trapped within short-term downtrends and, in my view, are better sales on rips then buys on dips. But the DIA is still trading within its balance area. Until that changes, the edges of balance are best faded.

 

Major Indicies Daily Chart
Source: eSignal

 

The one noteworthy change is the SPY. Having closed well beneath its 184 balance low and 50-day simple moving average, I believe it's fair to say that bulls operating within a short timeframe have a loaded gun pressed squarely against their heads. If they manage to recapture 184 and auction prices back toward 185, then we can consider the current break to be of little consequence. But if  the bulls fail to rise to the occasion on Friday and Monday, the odds begin to favor a more serious decline.

One last note regarding the SPY. I find it more than a little concerning that after breaking to new all-time highs in late February, the ETF was unable to stage any sort of meaningful advance. As you can see on the chart above, the SPY broke to new highs and proceeded to spin its wheels for five-plus weeks. Suffice to say that this speaks poorly of the strength of the current advance.

As you review the volume profile for the SPY below, please note that all trading beneath 183.90/184.05 encourages sellers to press their bets toward 182.80, 182.35 and 181.75. Any thoughts of a bullish reversal should be largely ignored until the bulls have recaptured 184.05.

 

SPY -- 5 Minute Volume Profile
Source: eSignal

 

A few thoughts on recently mentioned names:

  1. Nordstrom (JWN) is still trading under the top of balance. For those short, I believe a protective stop on close above $63.50 should be considered. Downside targets remain $59.50/$60 and $56.
  2. General Motors (GM) looks worse today than it did yesterday. With that in mind, I remain hesitant to sell short anything in the hole too quickly. Give this a few days of closing beneath $33.55 before assuming the bears are in control.
  3. Goldman Sachs (GS) still look weak, especially on a longer-term chart. Of all the major financials one might buy, GS and Citigroup (C) are the least appealing.
  4. Still nothing good to say about Twitter (TWTR). But if one is hell bent on playing this name to the long side, I'd look for an entry against $40.50 with a protective stop on close under roughly $39.

Any trading or volume-profile-related questions can be posted in the comments section below, emailed to me at parkcityyeti@gmail.com or posted to my twitter feed @ByrneRWS.

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