Yesterday produced one set of conditions you want to see for a more lasting reversal - that is a negative day that changes to positive, and a close at or near the highs of the day. There still seemed to be zero panic or the type of selling where everyone gives up and stocks are down -8 to -10% across the board, but we did see a horrific breadth situation last Friday and in a blink of an eye many stocks have gone from overbought to oversold. Some of the damage in foreign stocks (even non commodities) and the commodity space has been terrible and many can rally 10-15% before facing an inkling of resistance. Further, just as a year or so ago each day the entire market would trade as an inverse to the US dollar, now it seems to trade as an inverse to the (extremely oversold) Euro. Just change the currency in your algo and rinse, wash, repeat. So any (dead cat) bounce in the oversold Euro will be taken as a sign to 'buy, buy, buy' as well by the computers.
I was not really sure why we stopped where we did yesterday (S&P 1120ish) but looking at a longer term chart I suppose one can say this was the level the V shaped breakout/bounce of Feb 2010 started from and that provided support. I would have preferred a move down to test recent lows or at least S&P 1100 but let's see how it goes. In retrospect very happy with the sale of that last tranche of S&P puts yesterday near 1120, and if this market builds momentum to the upside I'll drop my less aggressive insurance (TNA short) with plans to rebuy at higher levels in the market.
We do have a return to normalcy (that is the premarket futures run up of 0.3 to 0.5%) on which almost this entire rally has been based, and with such oversold conditions in many stocks one can make a case for an oversold bounce in the S&P 500 to 1165-1175. I give that range because it depends on how quickly we get there (if we get there). Using simple moving averages which have been more important lately the 20 and 50 day moving averages have converged at 1175 so obviously as each day passes, the 20 day is going to look worse and the 50 day is beginning to flat line as well, turning from an upward slope. The 20 day crossing below the 50 day is normally a quite bearish development as well... [if you are curious the same thing is happening on the exponential moving averages but at 1165 rather than 1175]
If the market acts like it used to, any bounce into that level of 1165+ should be an excellent opportunity to re-engage shorts.
Until / unless those key moving averages are penetrated and the market can show it has its groove back, it's difficult to build any intermediate term positions on the long side, but certainly some quick slash and dash trading might be offered for the next 25 S&P points if this plays out. For now we remain in a very large white noise range that tells us little about the market past a day or three.