ChartAdvisor.com believes the trading pattern has changed and it’s set up for a year end rally. Near term the markets are overextended, ready for a pullback. Those who missed the October rally may want to jump in to catch the last train towards the year end rally by buying the market dips. True enough, yesterday and today’s markets are good opportunities to buy dips.
- SPY: support at 122.5
- QQQ: support at 57
Schaeffersresearch.com: also believes the market is bullish, but “three short-term risks to the bullish case include:
- The RUT is still in the red for 2011, and the MID is barely in the green, with the index’s first-half lows just overhead at 920. The fact that the MID is trading around a key round number with historical significance, which also happens to coincide with its year-to-date breakeven, is perhaps the No. 1 risk from a technical perspective. It will be of importance for the MID to make a more convincing move above 900 in order to squeeze more shorts.
- Another technical risk relates to the QQQ, a benchmark driven by many large-cap technology stocks. While outperforming impressively, it still has not taken out the 60 level, which is half its all-time high and has marked multiple peaks in 2011.
- A third risk is that much of the short covering related directly to the huge build-up of put open interest in exchange-traded fund (ETF) and index options is likely expended, as heavy put strikes that will expire in a few weeks are far out of the money and less sensitive to market gyrations. That said, short covering is still possible on individual equities, and those that are highly shorted with a strong technical and fundamental backdrop are likely to lead if the market continues to rally.
My take: I have to admit the first few days of October even got me scared, even though I am a strong believer of the contrarian theory, i.e., when others panic and well, I buy. When others are too complacent and in a euphoria, I sell. I played overly defensive in the rest of October, missing a large part of the October rally. This market pullback, I believe and hope, provides me (and probably many other market participants) another opportunity to re-adjust myself in the markets. So I have been cautiously changing from overly defensive to neutral.
