As a contrarian trader, I expect days like this. After yesterday's sharp drop, lots of amateur traders who read about it the night before piled on the short side this morning expecting to drop further. This is a perfect opportunity for the big financial players to whip the market around and stop these traders out. Also, keep in mind that this week is options expiration and erratic trading during this time is somewhat the norm.
Another reason why I expected this market pause is because of the technical support we hit at the daily 50 moving average on the SPY. Whenever you hit a major moving average or support level, you have to expect at least a small pause or bounce--just as I explained yesterday.
From an intraday perspective, the SPY opened the day down slightly at 131.69 and chopped sideways from there. The only surprise move came at 2pm ET when it was revealed that QE3 had been discussed as per the FOMC minutes. The SPY spiked almost 1 dollar on this news but shortly after it was announced that Ireland had been downgraded by Moody's to junk status and this brought the market all the way back in, going as low as 131.36. The SPY closed the day around the lows at 131.45--basically flat.
|News whips market up then right back down|
This is a good example of why I trade technicals and not fundamentals. Traders who bought the FOMC QE3 spike ended up giving back all their gains shortly after when Ireland was downgraded. For this reason, it's very important to follow the charts and only look to trade the best support and resistance levels. This strategy is crucial to avoiding the whips and saws of the market as much as possible.
Tomorrow is more of an unknown to me. Since we've satisfied the small pause/bounce requirement after yesterday's big move, Wednesday could either resume the down move or have another small up-day. The only scenario that would surprise me is a big move up. And of course, this assumes we don't get any other surprise news out of Europe overnight or pre-market.
Keep following this blog and my twitter feed for my latest thoughts. It will be interesting to see how the market digests Ireland's downgrade overnight. In the next few days I expect to have more long and short ideas on the market and in stocks. I just need