Tuesday, September 02, 2008

Major Indexes Stage Outside Reversal Day

Today's market action was not comforting if you are bullish. I often say that I dislike markets that open strongly, as they are prone to reversals. Never was that more true than today's session.

The Dow rallied roughly +245 points in early trading, but then fell by almost -300 points before bouncing slightly into the close. There was really no big news events that caused the reversal, it was just selling that began to feed on itself and gain momentum into the close.

If you look closely at the graphs above, you will see that the major indexes staged what are called 'outside reversals' today. That is, both the S&P 500 and the Nasdaq rallied above yesterday's high, but then reversed and close below yesterday's low. Hence, the moves for the day were outside of Friday's range, both on the upside as well as the downside.

This type of action usually leads to more weakness in the near-term. I would not be surprised by this, and actually have been looking for some near-term weakness, which is why I put those hedges on. I sold my financials hedge today, as that group has been acting much better, but I held onto my S&P 500 hedge.

The commodity selloff continues to weigh on things right now, even as it should be bullish for the market longer-term. If the market makes a higher low than the levels reached in July, it could set the stage for a nice year-end rally, which it seems like fewer and fewer people are calling for these days.

long SDS


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