Last Thursday, you'll recall, the Dow Jones Industrial Index bottomed at 13039.86, just pennies below its .382 retracement of the rally off the June lows. From there, we had a pretty good bounce into Friday morning's highs, and then another shakeout to a slightly higher low of 13040.17, which formed a neat double bottom with Thursday's low, and, again, just fractionally below that .382 retracement level. Then another pullback yesterday that held 12 points above the double bottom, and this morning the Dow shot back up to 13,274, a rebound of 234 points off of last week's double bottom.
I bought into last week's pullback as I said I would (on Tuesday) and as the market pops back up, I am selling some of these positions, primarily in the Dow. At Rydex (now Guggenheim Investments), I sold all of my Dow positions at the morning pricing of 13,257. So far, that looks like the right thing to have done. I'm still net long (up to 50% levels), but out of the Dow. For option accounts at Interactive Brokers and OptionsXpress, I have been hedging bullish bets by writing some out of the money December calls in the DIA after buying the December 129 calls into last week's pullback. So now, these are mildly bullish spreads.
The S&P 500 also did its thing to support the bullish case as it neatly filled its Sept. 6 gap at 1403.44 (which I also highlighted on Tuesday as a downside target). The low, on Friday, was just pennies lower at 1403.28. This morning, at the high of 1428.35, it's 25 points higher. Pretty tradable in my book.
Now, making me a bit cautious for the near term, is the gap from Oct. 23, last Tuesday, when the S&P 500 gapped down from 1431.81. That's now a near term upside target and I'd expect some stalling if the SPX returns to that level. The gap in the futures was a big one, originally from 1414.50 to 1430.00. Now it's been narrowed to just six points from 1424 to 1430.
The Russell 2000 helped to telegraph the recent lows as it failed to make a lower low last Thursday and Friday. A minor bullish non-confirmation. This morning, the RUT has blasted through its gap from Oct. 23. So some positive signs there.
Of course, supporting higher prices today is the short term seasonal trade as this is not only the first day of the month, which is historically quite bullish, but it's also the beginning of the strong six months of the year (November-April) -- sort of a "double whammy" effect from a seasonal perspective.
The McClellan Oscillator settled last Friday at a mildly oversold -113. That was a good time to buy. Yesterday it settled at -78, and today it's closer to neutral. So now, I am no longer thrilled about the long side and I am no longer a buyer.
The Volatility Index is closing in on its Oct. 23 gap at 16.62. Filling that gap may be about it for the near term and then there is this morning's gap to contend with at 18.60 and you know what that means. The only way for that gap to get filled is for the market to back off again. At some point, that gap will get filled. It is an absolute certainty, and I will bet on that.