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And Now, The Bears Take Center Stage

05/24/12 10:03:39 AM
by Billy Williams

Fundamentals cannot be outrun in the market, and there are numerous factors that are creating big opportunities on the short side right now.

Security:   SPX, BCH, AZO, AAP, ORLY
Position:   Sell

Worries over Greece made its impact known as stocks suffered big losses, extending the move downward and inching toward the 0.382 Fibonacci level (Figure 1). If the bulls are going to make a stand, then it will be at the 1289 price level on the SPX; otherwise, price will continue to slope downward to the 0.618 Fib level, or 1205 price level on the SPX.

For bears, this is the making of a weak summer as the seasonal doldrums begin to take over on the eve of increasing bad economic news. Already, Spain is beginning to buckle and the news wire is beginning to see negative news about Greece once again become the center of attention. With the European Union in trouble and Europe facing solvency issues at the outer periphery of its member states, the frightening possibility of all that it might entail for global markets, particularly the US, begins to enter the forefront of both policy makers and the financial community.

FIGURE 1: SPX. The SPX is still trading within its 0.382 Fibonacci retracement zone where it has the potential to reverse course back to the upside but is likely to test 1300 levels for support before making such an attempt.
Graphic provided by:
The one thing you have to understand about the current crisis overseas is that even though intelligent men and honest lawmakers frantically put together budgets and austerity measures that may guarantee that the crisis could be contained and reversed to the point where it is fool-proof, the fact remains is that nothing is foolproof to a sufficiently talented fool.

Human beings' sense of expediency, to do the easy thing that benefits them over others, will tend to shine through at the absolute worst time. In this case, self-serving politicians can be counted on to do nothing in the face of catastrophe in order to secure the reelections even if the short-term pain to fix the problem would achieve a long-term solution.

So what does this mean to you right now?

FIGURE 2: BCH. Right now, the bears are center stage in the market and stocks such as BCH are setting up shorting opportunities across the board. Look for brief pullbacks and short declines before playing to the downside.
Graphic provided by:
Primarily, now that sentiment has reversed and the domestic economy is soft, look for the bulls to pass the baton to the bears for the control of the market at least in the short term, possibly the intermediate term.

Now is the time to play to the short side of the market.

Today, the NASDAQ tumbled 2.1% to a new three-month low while the SPX extended its losing streak to five consecutive trading sessions. The SPX lost 1.5% and neared potential support at the 1300 price level, while the Dow Jones Industrial Average (DJIA) dropped 1.2% and selling volume rose across the board. See Figure 2.

Advance Auto Parts (AAP) gapped down, plunged 17%, and trading through its 200-day line at nearly seven times average volume. Before the open, AAP delivered its first-quarter results, which were sadly below forecasts and gave a disappointing profit outlook over the next year. In recent weeks alone, the stock has lost nearly 25% of its value with more downside possible.

In addition, AutoZone (AZO) and O'Reilly Automotive (ORLY) were severely hit across the sector and are likely to trend downward.

But auto retailers were not the only ones to feel the bit of the bears and offer short setups. Banco de Chile (BCH) broke its uptrend and has been the long deep slope down as price declined and sliced through its 0.382 Fibonacci level. If price doesn't make a convincing rally soon, then look for a brief pullback and then a resumption of the downward slide to its 0.618 Fibonacci level at around $78. Such a move would put a short seller in a position for a quick 10% return, more if put options are deployed.

Look for more shorting opportunities as the market continues to experience distribution, but be mindful of any attempts by the bulls to regain control by noting any increase in buying volume and by being prepared to make the switch to the upside when needed.

Good hunting, good trading.

Billy Williams

Billy Williams has been trading the markets for 27 years, specializing in momentum trading with stocks and options.

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