The 100-Day Has Been Breached. No Capitulation Low By Tues Would Be Bearish

February 3, 2014

Last week the market tested the 100-day moving average for a second time. Support held, but the price action was nervous. Today, that support level has been breached and buyers are not engaged.

In the last year, the 100-day moving average has been challenged three times. Each of those times it has presented an excellent buying opportunity. In each case, the SPY breached the support level. Bulls bailed out of long positions and bears got short. Those moves resulted in a capitulation low. Buyers stepped in and shorts were squeezed.

The market did not spend much time below the 100-Day MA in each of those cases. If we do not see a snapback rally from this deep intraday low, the selling will continue.

Asset Managers do not want to stick their necks out. They want to feel the panic before they buy.

The news has been rather heavy, but those issues have largely been resolved. China’s official PMI was better than expected and it was above 50. They will bail out the investment trust and their markets will be closed this week. The FOMC stayed the course and it tapered. Currency issues in Turkey and Argentina will have to be resolved by market forces. Most companies have announced earnings and those results are known. For the most part, they have been good. Earnings growth this quarter is above 7%.

Stocks tried to rally overnight, but they quickly caved in after the opening bell. After 30 min. of trading, ISM manufacturing was released. It was much weaker than expected and we hit an air pocket. Some of the miss could be attributed to bad weather, but sellers wanted to test the 100-day moving average.

It has been tested the last two weeks, but it has not been breached. These breaches are important because they trigger many orders. The move could be bona fide or it could be a shakeout. We will only know in the next 24 hours.

Credit concerns are ever present. Global debt levels are at record levels and deficit spending is out of control. One domino could fall at any time, starting a chain reaction. I don’t feel this is the case currently. PIIGs yields have remained stable and that would be the first sign of trouble.

The jobs report will be released this week. Bad weather could impact it as well (especially construction). The key will be December’s number and we need to see a revision upward.

I am hanging on to my put credit spread positions by my fingernails. They are taking a heat. I exited my call positions earlier this morning when the 100-day moving average was breached. I want to see that capitulation low. If the market bounces and it closes back above SPY $177, I will jump back in.

The macro conditions have not deteriorated dramatically and I still feel this is a normal correction within a long-term uptrend. The question is, “How deep will the correction be?” Will it be 10%, 15% or 20%?

At this juncture it is best to take your lumps and head for the sidelines. Watch for the air pocket and be ready to jump back in if we get that sharp intra-day reversal. If not, stay on the sidelines and wait.

I am not shorting at this time. If we do get a reversal, the action will be VERY fast and I don’t want to miss the bounce.
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