Stock Market Viewpoint

Stock Market Viewpoint
Reading the Tea Leaves...

Friday, October 23, 2015

SPY: Half Off the Table

Following up from my Thursday 10/15 post discussing the short squeeze was over but there was a new buy signal with a successful back testing of the 50 EMA line, we have seen the SPY has run nearly four percent in seven trading days and has now reached short term overbought.  I decided to close half of the SPY position as the S&P has reached the upper line of its primary channel (the red line channel shown in the chart below).  

Click on image to enlarge

The fact that the S&P did hop back up into its horizontal black line channel with Friday's gap up is quite bullish and the primary reason I am keeping the second half of the position for now. The risk has become elevated here, however, as the market could just as easily gap down Monday morning as it could gap up.  If the stock market's central planning agency (the central banks) has decided to continue the squeeze, a positive close Monday would capitulate the most stubborn of bears caught on the wrong side of the trade.  A negative Monday close would draw in enough bears to cause a pullback.
The swing factor will likely be how many chasers become fearful that they have missed the boat and therefore, put in the late entry buy on Monday.  If the Fed and its associates see enough chaser buying, there will be tremendous temptation for them to keep this train running since it is so hard to get it moving again after it has stopped.

Another very important swing factor for the direction of the coming week is how the Nasdaq trades on Monday in light of the fact that it closed right at the lower line of its previous four-year blue line uphill channel shown in the lower half of the chart below.

Also noteworthy is the fact that the VIX printed a hammer reversal candle as it touched down to its lower channel line today (shown in the lower half of the top chart cluster).  While the VIX can stay at that lower line for some time, the possibility for a negative knee jerk reaction dictated that at least half of the position be closed because of this possibility as most traders have considered this rally highly suspect and their gradual short covering has kept it going.

Then as the market looked done, Draghi's comments perfectly timed put the icing on the cake.

Trade well my friends