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Sell Into Any Rally You’re Lucky Enough to Get

Options expiration should come with some short covering


Yesterday, the world worried about the economic conditions of Europe, Asia and the United States. Before trading started in New York, Europe’s stock exchanges had fallen an average of 5.33%, and so traders suspected that they were going to be in for a rough day, and they were correct.

Trading started with the banks being hammered and with European banks heading the list of losses. After it was announced that U.S.regulators would be focusing on the health of foreign banks, Societe Generale fell 12% in Paris, and Barclays was down 11% in London.

Then the coup de grace was administered by the Philadelphia-area manufacturing index, which fell to negative 30.7. Economists had expected a gain of 2.2%. And existing home sales plunged 3.5% in July to 4.67 million instead of an expected 4.87 million units.

The Dow Jones Industrial Average fell 417 points (3.68%), the Nasdaq was off 131 points (5.22%), and the S&P 500 lost 53 points (4.46%). Decliners led advancers on the NYSE by 9-to-1, and on the Nasdaq decliners led by 10-to-1. Volume on the NYSE totaled 1.6 billion shares.

SPX Chart

Trade of the Day Chart Key

A review: Just over two weeks ago, the leading indices broke a neckline (S&P 1,260) drawn from a broad top, and in just six days plunged 12.6% to a low of 1,101. The huge decline was accompanied by average volume of over 2.5 billion shares with hardly any gaining stocks. A reversal from our internal indicator, the Collins-Bollinger Reversal (CBR), occurred at the bottom, and for four days stocks traded in a range of 1,120 to 1,173, whipping back and forth as high-frequency trading computers bought and sold millions of shares in seconds. The top of that range was broken on Aug. 11, and for three days, stocks rallied out of the wide zone of high-frequency trading. But early this week, the advance was halted, and yesterday, sellers unloaded vast blocks of stocks, driving the index back into the wide range of trading as volume picked up again.

Currently, the low at 1,120 and the reversal low at 1,101 are under attack. Yesterday’s sell-off on high volume and huge volatility is a major gain for the bears, since it confirms the failure of buyers to achieve even a modest objective — the pivot point at 1,225. And it also establishes a trading zone at 1,120 to 1,204 in which high frequency machines will no doubt go at it again. The midpoint of the range at 1,162 could very well turn out to be a focus and traders might go long under it and short above it.

GLD Chart

UUP Chart

Trade of the Day Chart Key

With such gut-wrenching, high-volatility selling, it should be no surprise that money is again heading to the safety of gold and the U.S. dollar. Note that the SPDR Gold Shares (NYSE:GLD) broke to new highs on high volume as the metal rose to a new high of almost $1,822 an ounce. And the dollar jumped to its highest level in two weeks with the PowerShares DB US Dollar Index Bullish Fund (NYSE:UUP) gapping up from what now appears to be a solid triple-bottom.

Today is options expiration, and with that should come some short covering. Sell into any rallies.

Today’s Trading Landscape

To see a list of the companies reporting earnings today, click here.

For a list of this week’s economic reports due out, click here.

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Article printed from InvestorPlace Media,

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