That was the theme yesterday and there were few buyers in the markets yesterday.

I always advise a deep breath and a step back when we have days like yesterday because there is little to be done and if you want to get out you are better waiting for the bounce...even if it is just an oversold bounce. We tend to see pendulum swings that go too far in each direction...mostly driven by emotion but exacerbated by hedge funds these days who on a day like yesterday trade up to 85% of the stock traded in the market place.

I used to trade the SP500 futures and one of the most successful money making trades was to play the gaps. This was in a time when the markets were dominated and controlled by the futures traders which included hedge funds.

Today we can get a much better feel for what the hedge funds are doing by following the Proshares derivitives, the SPY (SSO SDS),and QQQQ (QID QLD). I myself always follow the SP500 because of my previous experience but the real place to monitor what's going on in the market is to follow these derivitives.

The reason is simple..Today, the hedge funds use pro-shares far more extensively to hedge and make short term moves as evidenced by the volume levels on these very liquid instruments that let them move in and out of the markets with impunity. When I traded the SP500 the margin requirement for just one contract was $30,000 and accounts were marked to market at the close of trading each day. Last I checked, because of volatility that figure was closer to $75,000 per contract....the Proshares derivitives are traded like stocks so margin requirements are much lower, particularly for hedge funds which typically run with 9-11% margin.

The 60 day moving average of the volume on the SPY which is simply a 1-1 for the SPX, currently runs around 232 million shares. Yesterday saw 273 million. The 2X leveraged SSO trades 22 mil while yesteday traded 27 Mil. Its complement the SDS which is 2X leveredged for gains in a falling market normally trades 42 mil and so you would expect to see a huge surge from those betting on a falling market...Only 34 million shares were traded in the bearish derivitive....Gives one pause...

Meanwhile, we have to remain faithful to our market health charts which in the last week surged into positive territory (turning blue for intermediate term buying).
Here is the blow-up of the key one to follow, the SPX:


We had a slope change yesterday and we don't know that this couldn't lead to a re-entry into a bearish slide (We don't think so, but we have to be prudent). We don't rush out and dump all our newly acquired long positions, but rather it's time to buy some downside protection if we are wrong.

BACK TO THE HEDGES....Time to put some hedges back on which we will remove if the slope changes back up or maintain and add to if we slip back into the orange area of the chart.

Here are today's hedge numbers which you can always find at http://www.pitbullinvestor.com/stockreports/quickhedge.html


How short lived might this downdraft be? How long do we have to chew our fingernails?
Lets get back to those gaps I talked about.
Here is an hourly chart of the SPY which we are using for our proxy of the SP500 with the recent gaps circled:


Notice that the Gap openings, whether up or down were quickly absorbed in all cases within 1-4 days. The statistical average for these gaps is that 93% are closed within 3 days. You can see why these used to be such money makers for traders who faded the gaps after the dust settled.

Yesterday's event is not going to be absorbed in 1 day, but the odds favor the most recent gap being closed by next week. If you are looking to get out use that closure to exit your longs and leave your hedges in place if you believe the sky is really falling...If not then this is the key area to watch for break above this area as confirmation of a continued bull rally.

This morning will be another down open after the weaker than expected employment numbers even though we had a favorable Import Prices report.

Where might the "bottom" be for this down move...The Volume by Price chart can give us a pretty good idea of where support and resistance is:


Keep your powder dry and learn to relax a bit with this apocylypse events. This too will pass.

UPDATE AT 9:45
I couldn't get this chart published before the open so it has this morning's opening gap. The thing of significance is viewing the volume by price bars which show us where all of the previous recent activity has been in the index.



Notice that these areas of high activity form bands of support and resistance, so we can fairly predictably predict where moves in either direction are going to run into trouble. We have a thick band of support running down to 107 to 108 which we challenged on the open this morning and now hzve backed off. Yesterday's chart had 108.50 to 109.50 and we closed the day right in the middle of the channel.

This is a unique but highly predictable way to view any stock, not just indices for a quick measure of where we can expect turning points.

at 11:07 AM EST

First off...Our market health charts have finally all moved into the "Buy without Hedges" area". I am going to add a "ZOOM" function on the health pages to allow us to see the nuances that tell me to hedge or not to hedge. Here is the SPX which I believe is the belwether for the rest of the indices because SP500 futures tend to lead other indices around by the nose.



You can see that on the far right we have a solid green line with an annotation to "Buy With No Hedges".
This is the first time since May 1st where we have gotten a green light...

Here is the Zoom view which gives you a better idea of what is occurring underneath the surface...



This is seasonally a weak period of the year...particularly in the last two weeks of August because traders in New York take their vacations, so volumes are light and prices can get volatile. The Volatility Index has remained relatively low however and I believe there is an underlying strength which is going to surprise. I am looking for a rally to continue with majority of retail investors still sitting on the sidelines. I rarely make prognostications, but am fairly confident that we will take out the April highs and perhaps even push through DOW 12,000 by the end of the year despite all of the current doom and gloom and talk of a double dip.

Henry Ford
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08/11/10 Pre-Market (with first hour update) at 08:51 AM EST

Stock futures are down sharply this morning. The negative tone follows the second straight dose of disappointing data from China and Japan’s weaker-than-expected June machine orders tally, which has dampened the mood among the country’s market participants ahead of the country’s second quarter GDP reading on Friday.

This is an Asian contagion reaction to a sharply lower market in Japan and China overnight.

In these cases it is always better to let the dust settle before reacting to them.

Expect a gap down this morning at the open on all the indices. Will return with an assessment later in the morning.

UPDATED AT 10:30
SP500 gapped down from the close of yesterday's trading but did not for a gap below the low. 1098/1090 comes in as initial support and will be the level to watch for the balance of the day.

Henry Ford
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Tuesday 08/10/10

08.10.10 PRE-MARKET at 09:30 AM EST

Premarket traders are leery about what the Fed might have in store when the FOMC releases its latest policy directive at 2:15 PM ET. Though there is uncertainty related to what the FOMC might plan, the dollar has staged a strong advance against other currencies, such that the Dollar Index is up 0.7% at the moment. Second quarter nonfarm productivity figures have already been released – they disappointed overall. Still to come are wholesale inventory figures at 10:00 AM ET and results from an auction of 3-year Notes at 1:00 PM ET. Corporate news flow continues to have little influence on overall trade.

That being said, all of our Market Health Indicators are now firmly in the blue and accelerating.

FOMC will keep markets in limbo until their announcement...but nothing unusual in that.

Henry Ford
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Monday 08/09/10

08.09.10 MORNING UPDATE at 11:56 AM EST

Still more of the same as we continue to trend sideways as the consolidation continues.
NFLX has recovered about 2/3 of its selloff (which didn't make any sense anyway), while the spectacular earnings season has got sidelined money still not willing to make the jump.

I personally believe all of this is about to change dramatically to the upside, contrary to the usual August trading patterns. Pundits complain about the low volume which is considered an indicator that recent gains are suspect.

I am in the camp that believes the light volume is a product of these markets and what is driving them so far. There is little to no retail (mom and pop) participation. Better than 90% of the trading activity is hedge funds.

It is now estimated that there is over 4 trillion in sidelined money which has never come back into this market after the 2007 bear reared its ugly head with common folks unwilling to take on the risk again from the heady highs of November 2007.

Now however they see that markets have recovered about 50% of those losses, are positive for the year, and are poised to break back above the 100day moving averages. With bank and money market interest rates so low they are beginning to feel they have missed the boat and any surge from this point will have a double effect.

Dyed-in-the-wool bears will be in a position where they have to throw in the towel and buy back their shorts (dynamically increasing the buy volume). In addition, with Congress on vacation, and the possibility of any near term legislation upsetting the apple cart, traders now are in a position to buy back into the financials. Even when congress returns in September, all of their efforts are going to be concentrated on getting themselves re-elected, not jamming through new legislation. Markets love a legislative logjam and usually take advantage.

Underneath all of this we have companies with lower than normal PE's brought about by the fear that has kept the retail investors sidelined for a year an a half. This has been a market of hedge funds, most of whom have acted like scalpers and only a very few successfully pulling off the big coups.

I rarely make predictions....but I do play the odds, and right now the odds are on the side of the Bulls and I would not be at all surprised to see us take out the highs of April in the next 4 weeks and maybe even break through 12,000 DOW by the end of the year....

If not, I will gladly eat crow, but stars seem aligned for a powerful rally.

Henry Ford
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Thursday 08/05/10

08.05.10 Morning Update at 12:55 PM EST

Stocks are continuing in their sideways consolidation which is what we like to see. The more of this action the less the probablility of a major correction.

Financials look like they are basing and this has been the biggest hinderance to a sustained rally.


We have formed a nice reverse head and shoulders basing pattern and I would look at $25 on a closing basis as our trigger for some choice financials. In this case we want to use the index to identify the sector move and then pick some choice stocks in the best of breed to actually form our buying group.

Traders have been watching for the financials to begin to participate as they have been largely absent and are necessary for a sustained rally.

As we get closer to that buy point I will walk you through the exercise of how to perform this selection process and why it is important to diversify those selections for better returns than the underlying index..

Henry Ford
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Wednesday 08/04/10

08.04.10 MORNING UPDATE at 01:32 PM EST

Markets are absorbing last week's gains quite well and holding above recent supports.
Once we get through this consolidation period we are now looking for further gains as we close out the balance of the earnings season, which as expected had a very positive bias for current earnings and future guidance.

Financials are still the laggards and eyes are on their recovery as one of the underpinnings of a substantial rally.

Henry Ford
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Monday 08/02/10

08.02.10 MARKET OPEN at 09:45 AM EST

Strong open this morning as we take another run at breaking through that next resistance barrier that sits at 1117.51 as a closing level of the SP500. A confirmed level there would give us clear air all the way up to 1175.

Earnings remain strong. The blended earnings growth rate (estimated & reported) for the S&P 500 for Q2 2010 is 36% versus an estimated earnings growth rate of 25.1% for Q3 2010. As of April 1st, the earnings growth rate was at 22.7%. Of the 336 (67%) S&P 500 companies who have reported Q2 results, 75% beat estimates, 10% were in-line, and 15% were below estimates. (Data provided by Thomson Reuters)

Here are the economic reports for this week...

Henry Ford
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