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Brian's Thursday Recap: Dip in S&P gives traders room to play; a fistful of reasons why there’s not more selling

Brian Shepard

Collective Intelligence!
I comfortably agree with the Fed’s Dudley -- will take 3-4 months to decide on tapering. “I think 3-4 months from now you’re going to have a much better sense of is the economy healthy enough to overcome the fiscal drag or not.” Topping is a process. I look at Wednesday's selloff as working off some of the excess in the overbought equity markets. Hopefully, the volatility will be around for a while as the undercurrents/complacency work themselves out, giving both the bulls and the bears a chance to play. My focus will be the economic data over the coming months, sustainable growth and the FOMC meeting in September. Time will tell, but in between we are calling all S&P traders to come out and play!

Good summary - Dip buyers aren’t being super aggressive, but once again “real money” isn’t exiting positions and it is this lack of supply that once again is helping to stabilize prices and making it so tough for stocks to suffer a material correction. Most people are sitting still and watching (actually there is frustration that prices haven’t sold off more – there isn’t a whole lot of enthusiasm or glee towards the late morning rally). People are a lot more reticent to sell than was the case before for a few reasons: 1) there is more underlying comfort w/”tapering” than is portrayed in the media; 2) people remain comfortable w/risk assets in general while acknowledging the likelihood/need for periodic periods of consolidation; 3) there are a lot of taxable gains that people may not want to realize and so suffering through a ~3-5% dip is preferable to selling fully out of positions; 4) “this tape doesn’t give you many chances” is a popular refrain. The working assumption by many is that this dip will look like the one from Apr and Feb – ugly but mild and brief. Those peak-to-trough declines were ~3-4% (4% from our most recent high gets to 1620 and 5% brings us to 1600). The 50day MA is now 1590 but this number is moving up every day and so by the end of next week it should be around ~1600. Rotation remains the theme – the discussions over the last 24 hours aren’t so much buy/sell for the overall tape but rather where to rotate to and from. The purest “bond proxy” stocks are getting hit hardest – utilities and REITs (note that American Electric/AEP and Nextera/NEE both plunged at the open but have since rallied off those lows). The other groups are in the red but more mixed (tech is actually catching a nice bid thanks to HPQ). Financials remain a favorite way to play “higher rates” although keep in mind they have rallied nicely when this whole “tapering” campaign first kicked off a couple weeks ago - Source.

Kathy is in fine form with her harmonics at http://structuraltrading.com   Kathy (08:59) ES, has small emerging Bat, that has a requisite to hold above 1632.75, so far bias remains to downside (validating bearish cross) but has important sup test 1632.75, ES premkt chart: http://screencast.com/t/AjTVAyIsX8 current chart http://screencast.com/t/4bkYeAshw

Posted here Tuesday - I have my first double matches on gold at this low. This is a major swing low on gold and silver - I cannot stress that enough - posted by Sam E (07:00CT).

Today’s S&P 500 trade started with 635k ESM and 3.7k SPM traded on Globex, trading range was 1632.70 – 1658.70. Wednesday’s regular trading hours (RTH’s), pit session trading range was 1647.00 – 1685.50 before settling at 1655.60, down 10 handles. As a reminder, the Nikkei 225 closed down 7.32% at 14,483.98 Thursday, which came after it posted a new 5 1/2-year plus high of 15,942.60 in early Asian action (Nikkei 225 was up 53.4% ytd at the peak) that day. A Nikkei News story says market players attribute the fast-paced tumble to high-frequency trading/hedge fund unwinds. Funny, I read retail players were in panic mode. ...

The regular trading hours gapped sharply lower, 19 handles to 1636.50 - 1637.00 with well above average volumes and plenty of weak shorts trapped in at low overnight prices. There were plenty of traders, bears and the mainstream media that were pounding the table for further declines following Wednesday’s blow-off top and sharp reversal on increased volume. The bears had their long- awaited opportunity, but in reality there remains time for another rally and swoon before we hear any real changes from the Fed, which will come in due time. Just not as immediately as June. The economic data has firmed a bit -- but not enough for this patient to walk uphill by itself. By midmorning the S&P traded an early low of 1634.50, just above the Globex low, converted the opening range and held the opening on the retest. From that point, the sideways to higher grind was back on -- printing a high of 1654.00, just shy of yesterday's settlement at 1655.60. The SPM was trading 1650 area when the 2:45 cash imbalance showed $620M to the sell side. On the 3:00 cash close the SPM traded 1649 area before settling at 1650.00, down 5.6 handles on the 3:15 futures close.
Brian Shepard is a 20-year exchange member of the CME Group.

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DISCLAIMER: The information and data in the above report were obtained from sources considered reliable. Opinions, market data, and recommendations are subject to change at any time. Their accuracy or completeness is not guaranteed and the giving of the same is not to be deemed as an offer or solicitation on our part with respect to the sale or purchase of any commodities or securities.  {jathumbnailoff}