We Are Hitting That Air Pocket – If We Do Not Get A Reversal Today – Lower Prices Ahead

February 5, 2014
Author: Peter Stolcers, Founder of OneOption

Yesterday, the market started off on a strong note and it established an early high. Throughout the day it was able to maintain those gains, but it was not able to grind higher. This is not the move we were looking for and we are likely to see another wave of selling. I would like to see us hit an air pocket that tests SPY $173.60. That is a horizontal support level. The market broke through that resistance to a new all-time high last October and it now represents support. That is also the long-term uptrend that dates back to June. Once we hit that air pocket, buyers need to step in and buy with vigor. The bounce needs to be sustained and we need to see follow-through the next day. Until this happens, Asset Managers will not engage. When we do get the bounce, the magnitude will be very telling. A shallow, brief rally will indicate that an intermediate trend change could be taking place. Earnings have been good. Profits are up 7.5% year-over-year and they could hit 8% as earnings season unfolds. Cash flows have hit record levels and companies are buying back shares. Bad weather has plagued retailers and it is impacting the economic reports. ISM manufacturing missed by a wide margin and construction was down. This morning, ISM services came in at 54 and that was better than expected. ADP showed that 175,000 new jobs were created in the private sector during the month of January. These were a good numbers and they should restore confidence. Unfortunately, the market shrugged off the news and stocks are flat. This is not a good sign. The Unemployment Report will be released Friday. Analysts are looking for 175,000 new jobs and for an upward revision to December's number. If the number comes in as expected, stocks should rebound. This wave of selling has a liquidation feel to it. When hedge funds get caught on the wrong side they are forced to adjust quickly to cover margin calls. The magnitude/duration of this adjustment is unknown and the process has a ripple effect. Credit concerns are inching higher. Puerto Rico's debt was downgraded and most analysts feel that default is close at hand. China's shadow banking system and currency fluctuations in Turkey/Argentina have traders on edge. PIIGs yields are stable, but that can change quickly. I still feel that this is a normal correction and I will trade with the five-year uptrend. We should be close to a bottom and I plan to trade the bounce if it happens in the next day or two. That bounce needs to follow through for a few days and we should challenge SPY $181.50. I will get long if the SPY trades above $176. As I mentioned earlier, a small bounce that quickly fails would be bearish. It would be a sign that more downside lies ahead. If the market can’t muster a bounce this week, that is also bearish. Look for a choppy day with lots of nervous trading. We want to hit that air pocket and we want to rally off of the lows and close on the high of the day. Anything less would be a disappointment. . . image

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