Ouch – that was a tough day!
Luckily we were not fooled for a second. Right out of the box, at 9:37 I said: "This is not a very good rally so far. Energy is most of it with over 1% gained there already, accounting for +3 on the S&P (it’s only flat). I think it’s a false rally and it’s already fading so don’t be hasty." As we are mainly in cash it was more of a watch and wait kind of day.
Ahead of the ISM data, which was awful as expected, we shorted XLE despite oil heading up to $100 and made a quick 25% on a day trade. The real risky move for the day was taking out some callers in the afternoon as we hope for a bounce tomorrow. The Dow was following my script (you can see yesterday's comments in full on the free site as we are testing a new comment system):
- 10:27: "Don’t forget 13,150 is my mid-point and we expect resistance here."
- 10:41: "I firmly believe we’re going down short-term, not up so I have to stand by that statement."
- 11:08: "I expect us to hold 13,000 so I’m not expecting too much down. We may spike to 12,800, even 12,500 but there’s nothing in the data that wasn’t expected by rational people and rational people like me are in cash and waiting to buy soon."
- 12:07: "Unfortunately, on a broader picture, we are just under 7.5% down from 14,100 (we throw out spikes in favor of well tested even numbers), where we topped out in October so the 7.5% line at 13,042 would be REALLY bad to break below and would almost certainly send us down to test the 10% rule at 12,690."
The Dow did finish the day at 13,043 and I apologize as my targets are not an exact science… Holding the 5% rule (and members understand how 7.5% is holding the 5% rule) gave me faith to take out Google callers and other callers we were well ahead on. We'll be looking for 2 bounce zones; First we will expect the completion of the 80-point bounce off 13,000. If we don't at least get that, things are very bad. Second, we'll be looking for 13,260 in the next few days. Anything less than that will be considered a weak bounce on the way to 12,500.
While we haven't jumped in and started buying yet, uncovering our calls was a risky move so let's make sure we retake our levels tomorrow or it will be time to re-cover at lower levels. This is why I don't mind taking the overnight risk, we would only have to buy back our callers and roll them anyway so this saves a step!
The big catalyst for today's drop was the ISM coming in at 47.7, much lower than the 50.8 in November and a clear sign of economic contraction. One more month below 50 and even Larry Kudlow may have to put Goldilocks to bed (amazingly, as of last night, he was still using that term!). Oil at $100 is, of course, an economy killer and we can expect all the stops to be pulled out tomorrow to make sure they print $100 at the close. Expectations are for a 1.8Mb draw in crude and a 1.6Mb build in gasoline and a 400Kb draw in distillates so it will take very little for the NYMEX traders to get their rally caps on.
Gold also flew up to $860 as the dollar came unglued, pushed even lower by interpretations of the Fed minutes which indicated the Fed was less concerned about inflation than a rational group of people would be expected to be. That pushed the dollar back through the 50 dma at 76.37. It rested at 76 and we are probably going to retest 74.50 now so we can expect another 3% at least on gold and crude before things settle down.
Speaking of the 5% rule, INTC hit it on yesterday's drop and they are on the top of my buy pile right now with very strong 200 dma support at 24 so we'll be looking to start scaling into the Jan '09 $22.50s at $5.30 with the expectation of buying more on a further dip but this should be a good place to make a stand. Hopefully, we'll get a nice bounce to cover into.
