Stay Flexible in this Ping-Pong Game
12/01/2010 8:36 AM
I would rather be an opportunist and float than go to the bottom with my principles around my neck.
--Stanley Baldwin
The recent pattern that the market has established -- opening in the opposite direction of way it closed the prior day -- is continuing. After a negative day yesterday, the major indices are gapping up strongly this morning on some better-than-expected economic reports from overseas. The main driver is the China Purchasing Managers Index report, which has indicated that recent inflation-fighting efforts aren't killing that hot economy.
We have seen quite a battle lately: Concerns about European sovereign debt have kept pressure on the market, while better-than-expected economic reports have provided support. The market has been rotating back and forth each day between which issue matters the most, and today the economic data is coming out on top. However, the Europe issues are not nearly resolved, and they are going to continue to generate a headwind for the bulls.
If this gap-up open holds, the S&P 500 will be pushed back up into the upper half of the recent trading range, with the resistance at 1200 within reach. The S&P has been flirting with support around 1175 for quite a while -- and, as I have indicated, I'm concerned that if the index keeps testing that level, it will fail. That won't be an issue this morning, and we can now think more about whether the bulls have the juice to push the S&P back through 1200 and turn the trend back to the upside.
In this sort of trading-range market, in which stocks ping-pong back and forth between two obvious levels, there is often a very sharp move in which the market finally break one way or the other. Opportunistic traders want to trade with the trend, so they will move aggressively once it looks as though the major indices finally have the traction to break the range.
However, traders will often help to keep the market stuck as they short the rips and buy the dips. If you look at the intraday action over the last 10 days, you'll see that the market has tended to move back toward the middle of the trading range each day after gapping one way or the other. If that pattern holds, then the gap-up open this morning will fade.
When the market is in a trading range, as always, I try to maintain an agnostic view of the overall market. I just want to focus on finding and exploiting good trading opportunities. Of course, the media are full of people making predictions about which way the market will ultimately go; however, I find that if we focus too much on that, we miss out on the opportunities that arise each day. If you have been a dogmatic bear or bull, you have been whipsawed lately as this market has changed direction on a daily basis. If you have stayed flexible, on the other hand, each day has presented good trading opportunities.
In short, it really isn't important that you have a market bias and identify yourself either as a bear or as a bull. There is often way too much focus on that, and you miss out on a tremendous number of opportunities if you don't maintain an open mind.
I don't know in which direction the current trading range will be resolved, and I'm not worried about it. My focus is to simply be prepared to react as the battle plays out. This morning the bulls are in charge, and we'll see quickly how much resolve they have, but I'll be ready to sell them some of inventory and lock in gains if I can.
The roller coaster ride continues, so buckle up and be ready to trade
