Calling the Turns

 | Oct 02, 2012 | 5:30 PM EDT  | Comments
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I know that, to some, it will all look like a bunch of random trading. A close-up look at the S&P 500 (SPX) -- cash and futures -- makes it look anything but random. In the bigger picture, note that the recent low in the S&P occurred pretty much when it was supposed to, right on Yom Kippur (last Wednesday). That's a multi-week low. Now we'll see how long that low can stand.

However, even if that low at the 1430.53 level is breached, it will have already served its purpose, at least for short-term traders, because there was a pretty good pop off that low into Monday's highs. And that high wasn't some random number. The SPX shot up to 1457.14 on Monday, which was a pop of almost 27 points from last Wednesday's bottom. What's so special about that? It's a fraction of a point from the .618 retracement of the 44-point drop that preceded it. That .618 retracement is just pennies higher at 1457.72. Apparently, 1457.14 was close enough.

From that level, the SPX sold off and fell back down to yesterday's gap, but did not quite fill it. Monday's gap in the SPX occurred at 1440.67. The low was 1440.90, so that gap was still intact. This morning, again, the market popped up at the opening and it looked like it was going to be off to the races. But if you were watching Monday's unfilled gap in the SPX at 1440.67 as well as this morning's gap at 1444.49, you might have said to yourself, "Let's not buy this pop -- let's see if these gaps get filled first." So maybe you sold into this morning's opening pop or maybe you waited for the pullback to the gap to buy, but, in any case, you didn't buy the initial pop. You waited, because there were two downside gaps beckoning. Since then, the SPX has pulled back to a low of 1439.89 (as of 2 p.m. EDT) and a little bounce has followed. That low of 1439.89 was less than a point below yesterday's gap.

SPX -- Almost nailing the Fibonacci .618 retracement of the pullback
Source: optionsXpress

So the SPX has been doing its part telegraphing moves. What about the futures? Let's take a look. Yesterday's pop carried to 1451.50 in the e-mini. Then, it was back down again. The initial gap was a big one from 1434.25 to 1438.75. Can you guess what the afternoon low was? It was 1434.25 and it popped back up from that level. Now, today, we saw another gap up opening and this one was from 1437.00. The initial pop carried to 1445.75 but that gap at 1437.00 still beckoned. So the futures sold off to exactly 1437.00 and bounced a few points before running the stops below the lows and below Monday's lows.

I was a buyer of October SPDR S&P 500 (SPY) calls on yesterday's drop to fill the gap. I then sold calls into this morning's pop and bought November calls on today's drop to fill this morning's gap. If I weren't watching these levels, I would have had no clue.

Emini Futures -- Gaps marking short-term turns
Source: RJ O'Brien

As for what's next, I'll be watching the 1433 level of the futures for now. A break of that area by more than a couple of points suggests a possible retest of last week's lows. Of course, just below last week's lows (1430.53 SPX) is the Sept. 11 gap at 1429 in the SPX. Just below that is the important area of the recent double-top from April and August -- 1422.38 and 1426.68, respectively. I can't rule out a pullback to that area and, if it occurs, I would rate it a buying opportunity.

After a -89 reading on Friday, the McClellan Oscillator settled yesterday at -52. That is somewhat encouraging. It's not oversold but it's within reach of oversold (-100). The Market Volatility Index (VIX) isn't where I'd like it to be, but at least it hasn't collapsed to lower lows.

VIX -- Could be worse
Source: optionsXpress

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