Cash is King this Week

Trading conditions this week have been about as severe as we can recall from recent memory. Add to this the fact that market sentiment is skewed by today’s options expiration and the only logical conclusion to make is that all short term money should be in cash (gold may be an exception to this rule, but it needs to hold support at this level for this to remain true). The market is at a very precarious stage in its cycles. We had evaluated the QQQQ earlier this week and determined that it had more room to fall before finding trend support. It turns out however that what is true for the QQQQ is not in fact true for the NASDAQ or the S&P indices. These two indices have arrived at their battlegrounds and what occurs here will determine which side of the trade we need to be on for at least the next few weeks. The NASDAQ, as you can see from the chart below, closed slightly below its uptrend yesterday and is trading below its 3-year breakout highs. It must hold at the 50-day average and volume must come back in or the bears are going to have a hay day on a retest of the 2170 area.

The S&P is at an equally important line of last defense. It has broken its uptrend and is now trading at its 3-year breakout support. If its 50-day average breaks down here it will be time to start looking to position ourselves in short positions and defensive sectors.

Going into today, we take the technical threats these two indices are faced less seriously than normal. Options sellers have near perfect conditions under which to manipulate prices into their maximum pain levels and this week’s trading reveals that this is exactly what they have been doing. Today we await the outcome looking for volume and price to move higher or waiting for a slow drift and a breakdown. Either way, the uncertainty of this week will soon be behind us.