Bin Laden Captured Dead!
Oh wait, that was just a rumor. But it sure was a great excuse to rally the markets this morning! As it turned out he really wasn't dead or captured. But plenty of traders are looking for any excuse at all to take the market higher with the misbegotten belief that "we have found a bottom". It just is not so. Nonetheless, through the ups and downs of human emotion that have characterized our behavior through the sands of time, traders are happy to rally this bear market for a while.
Also helping out on the economic front, jobless claims came in much less than originally forecast at 468K for the week of 10/6. Estimates ran as high as 510K. While that may be a great relief for some, it is still a severely high figure compared to historical standards. Nonetheless, the cup is viewed as half full rather than half empty. To the market, that is what counts.
Within today's market action, there was no action or conviction following the opening pop. Those caught up in the chase instinct as Austin pointed out this morning in the Market Pulse most surely bought at the highs and have seen prices erode since. Not only has Vega or volatility eroded throughout the day, but bid/ask spreads remain a mile wide making it all but impossible to profit from option trading.
For instance while the SPX rose seven points in the final hour, the SPX OCT-1100 calls went from roughly $12bid/$14ask to $14bid/$16ask. So someone fortunate enough to have bought at the $14 ask (exact turning point) before the close would have sold at $14 bid for exactly zero profit as the market moved up seven points - a poor risk/return ratio. Meanwhile the skilled gun slinging daytrader may have scalped slightly better than $1 were he/she able to get inside the bid/ask on both entry and exit - a very hard earned $1 indeed. That is why it is so hard to make money on big gap moves.
As for institutional followthrough from yesterday, we did not see as much of it today, and if option activity is any indicator, the biggest money was geared toward the bearish side most notably in the form of bearish debit put spreads.
All right, as far as fundamentals go, PPI and retail sales come out tomorrow and probably will not be as bad as the worse case painted scenario. The actual numbers will probably be negative and that is expected. They just may turn out "less negative" than Chicken Little would have us believe. Do not take this as a fundamental sign of strength. After all, it is still negative. However, the markets in their current state will likely view anything less than horrid as a positive sign.
Michigan Sentiment will also be released tomorrow. That too may weigh heavily on how traders behave. Again, anything less than horrid will likely be viewed as positive.
Forget fundamentals for now, which we all know stink. Let's take a look at the charts to see if we can find some direction in them. In short, they are a mixed bag with no predictable trend in place for now other than daily charts having reversed back to bullish and broken through some former resistance. The highest probability trades will likely be the upside once the shorter-term oscillators cycle down to oversold and then turn up, which would usher in possible call plays (if we can beat the bid/ask spreads). Let's take a look.
Dow Industrial chart (INDU):
Starting on the left with the weekly chart, oscillators say bullish, as do candles. But some definite resistance will be found at 9500. On the daily chart, resistance may be found at 9565, the upper Bollinger band. Notice the daily consolidation at 9000 and subsequent breakout at roughly 9050 yesterday from the bullish flag we outlined on Tuesday - a big move worthy of a pullback. However, daily oscillator is showing much strength and could last longer. 60/30 charts while looking for downward release from overbought will make for tough put plays against the upward prevailing trend. More neutral to bullish flags beginning to form here too. Too tough for puts. Too soon for calls.
NASDAQ-100 chart (NDX):
Despite nearing a bullish confirmed status, the gap up on the daily and 60 min charts needs to be filled. Judging by the bear flags forming, that may happen sooner rather than later. Then again, since JNPR beat earnings AND revenue estimates and guided higher for Q4 (never mind that they guided lower in 2002), it has put a rosy smell on the networking sector in after hours trading. That could rub off on the whole tech sector tomorrow. Yet, the charts remain overbought on a short-term basis with those bear flags offering warning to all would-be call buyers.
S&P 500 chart (SPX):
SPX is actually an interesting case study. We noted Tuesday that bearish divergence had confirmed itself on the daily chart. We noted too that a bearish wedge had formed on the 60-min chart. Neither came to pass. This is one of those instances where a divergence reading proved false. Here is proof positive that signals are not always accurate. In the case of SPX, the bull flag formations on the 60/30 charts proved true and SPX broke out. We have left the Tuesday lines intact in order to see the before and after.
As for current readings of the SPX chart, the daily chart is showing oscillator and candle strength, as is the weekly though both are at resistance. While there may be some upside left, the 60/30 charts are pinned to the overbought ceiling now and should cycle down against the prevailing upward daily trend. Tough to tell the direction tomorrow from the flat action today though.
Speaking of tomorrow, the VIX at 32.65 still reflects fear and suggest that tomorrow may be another day of consolidation. That would come as no surprise given the nearly untradable bullish free ride in the last two sessions, which needs to back and fill at some point. One thing we do know, the prevailing bullish sentiment will likely provide Bubblonians a buffer of sorts from what is guaranteed to be a decline in retail sales. Even if better than expected, it still is not good, but will likely be greeted nonetheless with enthusiasm by bullish analysts' calls noting that we have marked a bottom and all is great from here. Hearing those words should have traders antenna up bigtime for a bearish reversal coming soon to a trading floor near you.
Other than JNPR making a splash in the networking sector, truly excellent fundamental news is scarce and so likely is the immediate bullish trend at the end of week chock full of gap up gains. Some selling would certainly possible prior to the weekend.
See you at the bell.