Since Obama's inauguration, the market seems to have responded negatively to the president's rhetoric, and yesterday was no exception. Within seconds of a White House alert that the president and his chief economic advisers would make an important announcement, stocks headed south. And by the time that President Obama -- flanked by his team -- began the address at 3:50 p.m. Eastern, the Dow had given up more than 100 points, with investors fearful that the team had decided on a major policy shift.
Despite the poor timing of the White House's news conference, which contained little new information and spooked traders into a flurry of profit-taking, Wednesday's small correction did little to change Tuesday's upside reversal and the probability of further buying.
The volume was somewhat higher than normal, but most of that occurred before 3:30 p.m. Eastern resulting from two afternoon rallies -- one from Dow 7,187 to 7,332 and S&P 500 754 to 771, and the other from Dow 7,218 to 7,404 (S&P 759 to 780).
In their mid-week technical notes, Standard & Poor's said they expects a "counter trend rally" (a move up) to develop shortly and observes that the market has cycled into oversold territory on both momentum and "internal basis."
S&P noted that earlier this week, the S&P 500 (SPX) was more than 13% below its 65-day moving average, which matches the October oversold numbers. They think that the SPX could rally to the 805 to 825 area, and even though my numbers have a broader range of 750 to 875, we are in basic agreement regarding the high probability of an impending rally.
Pullbacks today should be contained at around the Dow 7,230 and S&P 760, but could extend down to Dow 7,155 and S&P 755. A daily upside breakout would occur with the indices breaking yesterday's highs and the immediate trading target for that would be a band extending from Dow 7,480 to 7,620 and S&P 780 to 797.
The market is very nervous and, except for extreme pullbacks, is not generally suited for longer-term investors.
For that reason, I've included the above numbers for traders who may want to work on quick turnaround trades and avoid the risk of holding stocks and exchange-traded funds (ETFs) for any more than a few days. It is important to not get caught up in the notion that the market has permanently turned until there is evidence that the current rally is nothing more than a solid bounce in a bear market.
However, if speculation is your game, you should take a look at a trade on the Ultra S&P 500 ProShares (NYSE: SSO), my trade of the day.
Sam Collins is a contributor to OptionsZone.com.
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