Stock market remains in very bearish mode

The BOGI down gap that was possible just 24 hours ago (which might have become the first-ever uncovered downward gap) has been all but covered.

The buy programs kicked in early Tuesday morning, as I alluded to in several StockTwits messages, and the market recovered most of the ground — but not all — lost in Monday’s electronic session.

But while the bear did not get the feast that might have been possible with a breakaway gap, the bear remains very much alive and well.

In times of market volatility it is best to retake high ground and look at the big picture. If we do this, here is what we see.

1. The dominant pattern in the stock indexes remains the H&S top completed in late July/early August. Nothing has changed.
2. Practically, the gap remains open in the Dow. Remember, there is a difference between the hypothetical high and low in the Dow and the real high and low prints. While today’s official high is listed at 11,237 at the open, in real trading prints the Dow opened at around 10,970. In print terms, a gap remains open at 11,216. See intraday chart lower in this post.
3. Even if the gap is closed in the DJIA and SPY, nothing changes except the most bearish scenario is taken off the table — for now.
4. The gap down this morning begged institutional and program buyers. They responded, and the market rallied from a line of support as represented by the lower boundary of a flag (or, if you prefer, a bear channel).
5. The volume was not heavy, continuing the classic volume profile of a counter-trend rally.
6. Resistance should stiffen on any further

Today was a reversal of sorts in that the DJIA opened near its low and closed near its high.  This is likely to attract some additional buyers and give today’s early morning buyers courage to pursue their buying programs. [Note: When I say “morning,” remember that I am in the Mountain Time Zone.] Yet, today’s price action does not meet the Edwards and Magee definition of a reversal day.

The burden of proof, in the shortest-term, remains on the bear forces. If these forces can prevent the DJIA and SPY from filing their gaps, the market should fall away quickly in the next day or two. If the market can close above Friday’s close, then some additional squeeze can be put on the shorts. The intraday chart below shows the real prints in the DJIA and displays Tuesday’s gap. By the way, it also reveals that in “print” terms, a downward gap took place last Friday. 

The SPY chart below shows Tuesday’s real gap.

From a trading standpoint I had a lousy day, but not because of the stock market. I remain short the S&P futures from August 2. I added more on September 2 and sold a final layer early Sunday evening. I have stops just above Friday’s close on a third of my short position only.

It was the Soybean Meal market that served up my humble pie today. The decline in Soybeans and Soybean Meal appears to be a retest of their respective breakouts. I remain fully committed to the long side of Meal. The CFTC COT data released last week was bearish on Soybeans. Yet, my trading rules dictate my tactics, not the COT data.

I was a light seller of the EURUSD today. This market is attempting to break down out of a top area. A major trendline rests near the day’s low, as shown below.

Let me close this post with a brief comment about the speculative process. In my experience — and I know others with a different experience — the really meaningful profits come from holding onto positions, not from active in and out trading maneuvers. But holding onto positions is not easy work — if is was, everyone would be doing it. It is impossible, again, in my opinion, to both be preoccupied with intraday price behavior and to be a position trader. To be a successful position trader, one must ignore unrealized profits from open trades. Things were much easier in the old days when I only saw my account balance once each day.

I am not immune from emotional pulls from the markets. For this reason I will be turning off my trading platform during the session. As a result I will be sending far fewer intraday messages. My apologies, but I need to look after my own interests first and foremost.

Markets: $SPY, $ES_F, $DIA, $DJIA, $SH, $EURUSD, $ZM_F