Wednesday, January 27, 2010

Ridiculous Market But an Unbelievable Setup

Today was as absurd as any day can be but playing out very close to what I thought (well hoped) it would play out. New home sales, one of the most important leading indicators for the economy, fell apart and is getting dangerously close to its all time low. Asia was down for an 8th day in row. Europe was down 1.4%. Emerging markets have been getting slaughtered. Greece cds blew out to new records again as the country teeters on financial collapse. Copper was down 4% today, oil was down over a buck. The Fed continued with their plans to end the MBS purchases in March and yet the market ended up. Why? We went down and hit major resistance and the computer programs said buy, so the market went up. Nothing about it makes sense.

However, this is setting up for an amazing shorting opportunity. Not only do you have the potential for a big move, you know when you will be wrong (stop loss), and you have a catalyst. You don't get opportunities like this very often.

So tomorrow morning you have jobless claims and durable good order numbers. Durable good order numbers were very quietly revised down a couple of weeks ago setting a low base. So the odds are it will beat expectations. Jobless numbers have been deteriorating also so who knows but an improvement would not be a surprise. More importantly I think Asia and Europe will be up strong on a relief rally. This sets up for a big up day tomorrow. At least initially. Then tonight you have Obama talking in the State of the Union address. There can be nothing that comes out of that speech that can be a good surprise for the market. There can be alot that comes out that could be a bad surprise. In reality that is probably a push. Friday, you will have investors starting to look towards next week and most importantly Volcker speaking in front of Congress. The odds are that will be a very negative event for the market though it may happen before (Friday and Monday) he gets up there.

Anyway, I don't talk about things in this detail very often but I have been bearish for months expecting a big move down. We hit major resistance. We are getting the bounce. The break and big move may be just around the corner. So the way you play it is you short (or sell long positions where you want to take profits) between 1100 and 1110. You have a stop loss somewhere around 1130. You also have a catalyst in Thursday night and more importantly, next week Tuesday.

It has been awhile since I have been this giddy. To really confirm that the momentum is broken and things have turned where we won't be going to new highs in a long time, you need to get through this 1080 area. This bounce will give the perfect platform to move back down and do just that. It is possible it doesn't happen but it is a good risk reward set up.

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