Taking Care of Unfinished Business

 | Nov 17, 2011 | 3:00 PM EST  | Comments
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SPX

,

spy

In Tuesday's column, I highlighted the unfilled gap from Monday at 1261.60 in the S&P 500 Futures as a near-term, upside target and reiterated that I was still "looking to sell into the 1276 area of the SPX and looking to buy on dips to 1218, the level that is home of the Nov. 2 gap. But now, I can add that I'm selling at yesterday's gap at 1263.85. At least I could say that if there were such a gap in the cash; but, there isn't. However, there is the gap in the futures from yesterday at 1261.60. So, that's now a target for me to sell into for the short term."

The high later that day, on Tuesday, was just a fraction of a point above the gap in both cash and futures. The futures made a high of 1262.00 late in the day and the cash topped out at 1264.25, in both cases just 0.40 above their respective gaps (or in the case of the SPX, the level that would have been a gap had there been one). From there, it's been down sharply. And wouldn't you know it...already back to fill the Nov. 2 gap that I mentioned again at the 1218 level of the SPX and, not far below that, the Oct. 21 gap at 1215.38 that was never filled on that plunge into the Nov. 1 low at 1215.42.

So, lots of missions have been accomplished. As you can imagine, I'm using this selloff to these downside gaps to further add to my bullish positions. Currently, I'm buying some Dec. 122 calls in the SPY and, most likely, I will also add to my modest, mutual fund holdings at today's close. Yesterday, I bumped positions back up to a range of 30% to 40% invested after cutting back a bit on Tuesday. At today's close, if the market is trading near the lows, I will likely return to a maximum of 50% invested.

The S&P Futures chart below is based on prices from earlier this morning when the morning low was 1224.50, just a point above the Nov. 9 low. Since then, after a mid-morning bounce, the futures have plunged to a low of 1208.70.

S&P Futures - Selling off after filling Monday's gap
Source: lind waldock

So, gaps in the futures have been filled on both sides. In cash, where the gaps do not always show up, today's selloff has, in fact, filled both the Nov. 2 gap at the 1218 level and below that the Oct. 21 gap at 1215.38. Yes, it's gone a few points lower to 1211.36, but that does not alter my view or strategy that I want to add to positions on this drop.

In fact, I like this level for another reason: the Fibonacci 0.382 retracement of the explosive rally off the Oct. 4 lows comes in not far below today's low. That's at 1209.43, which adds to the significance of the support at this level. Granted, it can go lower still, but that is why I am only planning to go to a maximum of 50% invested levels -- right?  

If the 1209 level of the SPX gives way, then the next downside gap is a long way down at the 1155 level, the Oct. 10 gap. On a break below 1209 SPX that becomes a possibility, though I will bet against that. 

SPX (S&P Cash) - Heading for another Fibonacci retracement
Source: optionsXpress

Something else to like about the market here is the way the Russell 2000 is behaving. Note that yesterday the RUT made a higher high for the week even though nothing else did. Today, on the drop, the RUT is still holding above its Nov. 10 lows, while the SPX is well below comparable levels. Maybe this is the beginning of the much-misunderstood January Effect, in which small-caps outperform large-cap stocks. If so, that's a good sign for the overall market.

Russell 2000 - Signs of the January Effect
Source: optionsXpress

The indicators are looking better by the minute. The McClellan Oscillator closed yesterday on the oversold side of neutral at -62 and should be well into oversold territory at today's close.

The Market Volatility Index (VIX) is now popping up sharply to the 36 level once again. Maybe the VIX will go higher still, as those who were buyers of the market with the S&P in the 1260s just a couple of days ago now race to buy put protection. Maybe the VIX will go higher, and the market will still go lower. I hope so. I want to buy when there is "blood in the streets," and we're not there quite yet.

VIX - Heating up as the market approaches support
Source: optionsXpress

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