A recollection of my analysis for buying when S&P broke down to 820 today

[caption id="attachment_728" align="aligncenter" width="500" caption="SPY"][SPY][][/caption]

[caption id="attachment_718" align="aligncenter" width="500" caption="S&P intraday"][S&P intraday][][/caption]

Finally! I have been waiting for a bear market rally for weeks! I decided to go full long after the bounce from 820 today. Refer to that post for details of my entries. In this post, I would like to discuss why the 820 bounce gave me the confidence in going all in despite widespread fear and the many failed attempts myself.

A quick recap of the past week's action. After the failed rally attempt from 10/28 to 11/04, the market has been brutal to say the least. Any strength failed to stir enthusiasm and has bled down slowly. The market drifted down lower on little volume day after day. If I were to describe the market, I'd say it looked like the last moment of a dying man. This lack of will to move has certainly killed many bulls. I was one of them. I have been stopped out a few times trying to catch this falling knife (more like a grind). I even prepared to exit the last of my holdings if we do break down from this point.

From the beginning of the day, the market looked like it's going to be another down drift today. But being very near the 10/10 bottom already, I know things are going to move one way or the other before the options expiry next week. And since the Max Pain for the index options are at least 10% higher, I am still looking for a reversal soon.

I mentally noted S&P at 845 is an important level. It was the low of the 10/28 big rally day. The market skid on the 845 level all morning with little volume. That was good because it is testing a support on low volume. I had thought we may bounce from there.

Then I went to lunch just before noon.

When I got back after 1pm, the market has already broken down. However, there are several bullish indication I noticed.

  1. the break down volume is higher than the previous bar (Figure 1), but it's still relatively low. Which means we don't have panic selling yet.
  2. both the TICK and Advance-Decline line moving averages (Figure 2) are relatively healthy for such an important drop. Indicating no broad selling.
  3. notice the unusual V shape for the TICK (Figure 2)? We even reached a new multi-day low of -1666. Yet #1 and #2 contradicts this seemingly panic selling, so this depression in price looked artificial to me

Like how the recent rally attempts lacked enthusiasm, this break of 845 and test of 820 looked like it lacked enthusiasm too. Given that this is such a major support level, odds are that we will bounce from here at least for intraday. That is when I made my entry.

Before 2pm, we broke 850, the low of yesterday, with the highest 30 min volume of the week. That is when the rally looked strong to me and my doubt of a bull trap eased. Frankly, I had some tight mental stops and prepared to jump if things deteriorate like the many times before.

The day continued strong with price and volume confirmation. We closed at the high with significant volume. We even reached 700 million volume on SPY, a first since 10/16. I believe an intermediate bottom has been set so I'll be looking at a longer timeframe (days) for my long positions now.

First expected resistance from this move is 980 on the S&P from the trendline (Figure 1, right). Target is at least the 50 dma, we just haven't touched it for 2 months. This is as good a time as ever to give it a run for it.

Today is a great example of the need for critical thinking with a clear head in light of a lot of pressure and past emotion. The beaten account, the grim market movement, and the many stopped out trades has nearly made me walk away for the week. But I remained focus on the market and made my decision based on the price action.

Despite renewed optimism, I will continue to practice prudent risk management and to eventually pocket at least most of the profit from today, if not more.

[SPY]: http://traderpau.files.wordpress.com/2008/11/2008-11-13-spy1.png [S&P intraday]: http://traderpau.files.wordpress.com/2008/11/2008-11-13-spxintra.png