Ignore the Selloff Noise

 | Nov 18, 2011 | 11:01 AM EST
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As you probably recall, Thursday morning we were greeted with the usual headlines out of Europe -- this time it was all about the collapse of overseas bond markets as yields soared. Spanish borrowing costs had jumped to 14-year highs. That was supposedly a big deal.

There was plenty of commotion about this -- but, curiously, our market was behaving pretty well for the first couple of hours of trading, with most indices trading flat to slightly higher around 11:30 a.m. EST. Maybe that's because so few investors in the U.S. even know that bond yields are inversely related to price. In any case, about an hour later, the market got spooked by some news event or another (no doubt some headline out of Spain or Italy) and the S&P 500 fell to a low of 1211.36. When I was preparing yesterday's column, that's what the current session low was.

At that point I noted that, even though the recent Nov. 2 and Oct. 21 gaps had been filled (at 1218.28 and 1215.38, respectively) and exceeded on the downside, there was another reason to "like this level."  

That was the Fibonacci 0.382 retracement of the rally off the Oct. 4 lows, which I noted was at 1209.43. I explained that this Fibonacci retracement "adds to the significance of the support at this level." Apparently so.

A little later in the session, at 1:45 p.m., the S&P made a lower low at 1209.75, which was just fractionally above the 0.382 level, and the index bounced from there. So it certainly looked like, yep, the 0.382 level was doing its thing by marking a short-term bottom. If so, it wouldn't have been the first time.  

Late in the session it appeared as though that's all there was to it. What I didn't realize was that the market would make yet another slightly lower low before the day was out. This occurred at 3:41 p.m., just a few minutes before the close. Did you see where the S&P bottomed? The final low, as shown in the chart below, was 1209.43: A direct hit on the 0.382 level -- a bull's eye to the penny. From there, in the remaining few minutes of trading, the S&P popped up about 7 points to close at 1216.13. From there, this morning, the index has already traded up to 1221.45, though it has since pulled back to fill the opening gap.

S&P 500 (SPX) -- Daily
Source: OptionsXpress

Anyway, that's what the selloff this week has been about: completing the Fibonacci 0.382 retracement of the rally from the Oct. 4 lows. That's all. The rest is just noise.

As advertised, I added to my positions on yesterday's drop. Now I'm back to a maximum of 50% invested at Rydex. Supporting the near-term bullish case is that the market is now pretty oversold as the McClellan Oscillator settled yesterday at an oversold reading of negative 158.  

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we will add this here to cheaply protect our downside a bit BOUGHT SPY SEP 244 PUT AT 2.70 ...



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