Tiptoeing In Here

 | Dec 08, 2011 | 3:15 PM EST
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On Monday, as you may recall, the market shot higher on something upbeat on the eurozone mess, or maybe on some local news pointing to an economy not quite as dead as was previously thought. Whatever the reason (and who cares?), the market surged Monday and left a bunch of gaps beckoning below. Those gaps didn't get much attention Tuesday, but Wednesday saw the S&P 500 pulling back to within a whisker of its gap at 1244.28, making a low of 1244.80. From there, late in the trading day, it rose by a pretty serious 22 points to the 1267 level.

You may also recall my Tuesday column, in which I explained that if the market sold off to Monday's gaps before popping up to the Nov. 9 gaps, I would add to my modest bullish exposure. But the downside gaps in the S&P weren't quite filled yesterday, so I didn't do much buying on the dip. I was looking for the 1243.50 level of the December E-Mini futures and the 1244.28 level of the cash index, each of which missed those respective marks by about 0.5 points.

This morning, however, that gap was being probed again. As that happened, I bought some SPDR S&P 500 (SPY) January calls, and also at Rydex -- for which, on Monday morning, I had further cut back on my positions at the 1265 level of the S&P. This morning's price, at 1250.88, wasn't too great. In the chart below, you can see that the early low was just pennies below the gap at 1244.19. Since then the S&P has made a lower low of 1241.66, and a decent bounce has followed, but now it's selling off again.

S&P 500 -- Returning downward to take care of Monday's gap
Source: optionsXpress

So does the pullback to Monday's gap mark an important bottom? Probably not -- but, for me, it's at least a level at which I can add to modest bullish bets following cut-backs at higher levels. Why not? Most of my accounts currently have only 10% to 20% exposure to stocks. If I were 90% invested, I wouldn't be adding at all. I would only be looking for spots where I'd be able to sell. But, with such modest exposure, I can afford to add another 5% here -- and, if it goes lower, it's no big deal. I'll simply add some more.

One spot that I would love to see is way down at the Nov. 30 gap at the 1195 level of the cash index. I won't hold my breath, but if that gap is seen in the days ahead, you can bet I will be buying there.

Adding to my short-term bullish thesis is the action in the Russell 2000 -- on which, in some accounts, I nibbled at Thursday morning's level of 736.46. Monday saw this index almost filling its Nov. 9 gap at the 755.27 level, stalling about 2.5 points shy. On Wednesday, it warned of some trouble ahead, as it didn't confirm that day's higher high by the Dow and the S&P late in the session. In fact, the Russell 2000 made three consecutively lower highs while the Dow made three consecutively higher highs. As usual, when you see that kind of divergence, you want to bet on the Russell 2000 over the Dow.

During Wednesday's early selloff, the Russell 2000 gave a short-term positive signal, as it filled its big gap from Monday at the 735 level and bounced. Of course that still left last Friday's gap at 730.75. As such, this morning, after bouncing off of yesterday's low, the Russell was pulling back further to fill that gap. Maybe filling the gap at 730.75 will mark a bottom for the near term. In any case, I'm willing to do a little buying of the Russell if it closes in this area around 730.

Russell 2000 -- Many gaps in the mix
Source: optionsXpress

I am not thrilled with the indicators at current levels, so that's keeping me a bit cautious in here. The McClellan Oscillator has registered three consecutive readings on the overbought side of neutral, registering at plus 62 yesterday. I'll be more inclined to add more aggressively to positions once that indicator is back to oversold levels -- oh, and yes, it will be.

Similarly, the CBOE Volatility Index (VIX) isn't giving me much to get excited about as it hangs around the 30 level. If it spikes back up to the mid- to high-30s then, OK, that would help. But, with so many betting on a positive resolution to the European debt crisis and good things to come out of the European Union summit Friday -- not to mention good news on the domestic front and favorable seasonality for the next several weeks -- this is still no time to be making big bets on a further rally over the near term. The fact that the market has come such a long way in a hurry -- already up 1000 points in the Dow over the past eight sessions -- is a related reason to remain a bit circumspect at current levels.

VIX -- Still reflecting too much complacency
Source: optionsXpress

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