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Don’t Trust the Early Market Action

In this market, large gaps up or down at the open cannot be trusted


Current Long Positions (stop losses in parentheses): TICC ($10.28), RAH ($60.75), EQY ($16.75), PH ($78.95), GIL ($29.16)

Current Short Positions (stop losses in parentheses): DTV ($42.55), EQR ($51.15), VPRT ($42.37), TIE ($17.84), ITT ($48.01), GLAD ($11.54), FCN ($36.74), SNIC ($10.40)

Bias: 26% short

Economic Reports Due Out (times are EST): MBA Purchase Applications (7 a.m.), Challenger Job-Cut Report (7:30 a.m.), ADP Employment Report (8:15 a.m.), Productivity and Costs (8:30 a.m.), ISM Manufacturing Index (10 a.m.), Construction Spending (10 a.m.), EIA Petroleum Status Report (10:30 a.m.)

My Observations and What to Expect

* Futures are up in excess of 1% heading into the open.

* Asian and European markets are up strong off of Chinese manufacturing data.

* Today’s strength heading into the open will give the bulls a shot at breaking out of the descending triangle pattern, with an outside shot at challenging the all-important 1,200 mark on the S&P 500.

* The 1,173 price level on the S&P for the bears has become what 1,200 is for the bulls. Yesterday marked the third attempt, and the second in as many days to break through the critical support level and create a new low. There are a lot of buying programs coming in at that level.

* Even if the market breaks out of the descending triangle, it means very little until it can take out the 1,200 price level.

* We ended yesterday with a doji/spinning top candle, which has been an end-of-month trend of late. Volume was the highest that we’ve seen since July 1 of this year.

* The one thing that we’ve learned about this market is that large gaps at the open, whether up or down, cannot be trusted. Some of them stick, but an uncharacteristically high number of them do not. October consolidation represented this very well.

* We dipped below the 50-day moving average, but quickly rebounded to finish just above it.

* Bears will be on the defense today, and their main goal is to defend against 1,200. Ideally, they should try to keep the S&P from pushing through the descending triangle. Ultimately, a push below 1,173 is a must. A close below it and the upward trendline from the August lows is dead.

* For the bulls, initially, they need to reclaim the 10-day moving average and break out of the descending triangle, followed by a close above the 20-day moving average and 1,200 price level, which are joined at the hip.

Actions I Will Be Taking

* Will add two new positions to the portfolio (one long, one short).

* Stop losses remain as is.

* Stopped out of Bank of America Corporation (NYSE: BAC) at $11.02 for a 2% loss.

* Added Gildan Activewear Inc. (NYSE: GIL) (long) and Sonic Solutions (NASDAQ: SNIC) (short) to the portfolio yesterday, near the close.

* Follow me in the SharePlanner Chat-Room today for all my live trades, including my day trades.

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