Turaround Tuesday Watch, but be Careful

Yesterday’s whipsaw trading was extreme. The market dipped in the morning, recovered on heavy volume as prices pushed up into the green, but then they reversed hard again in the afternoon as buying momentum stalled and selling took over again.

Blame the Yen. The carry trade in the Yen has been driving the liquidity, and/or lack thereof for months now. Yesterday’s market reversals tracked the strength and weakness of the Yen throughout the day.

The big question here is are prices ready to accelerate to the downside, or are sellers running out of momentum. Data indicates the later.

The VIX is now back at the exact same level of fear that preceded the hard reversals higher we witnessed on June 8 and June 13. Put buyers are still investing in higher than 3-1 puts to calls. And, on top of all that, the QQQQ has not broken its trendline and the SPY, while back at its June lows, is exhibiting bullish divergences on several important indicators.

It is certainly possible that downside momentum could accelerate here, but it is historically unlikely. It would be a real coupe if historically unlucky options traders actually hit the jackpot for a change. Especially now that we are nearing the end of the month when mutual funds are flush with cash they need to put to work.

The bottom line here is that the market has failed to gain upside momentum when it had the chance after last Thursday’s goal line stand. This does not mean that the market has to now break down and start a larger correction. Unless and until we see the June lows breached, this market is in the neutral to bullish category. Moreover, with sentiment figures at ultra bearish levels and with indices at support and losing downside momentum, odds favor another turnaround Tuesday today.

One word of caution though, if buyers for some reason fail to move back into the market today and prices weaken beyond June lows, then it is best to quickly close out all long trades and get out of the way. Such a situation could cause a panic situation that leads to a better buying opportunity. Yesterday we mentioned this, if such a panic ensues, we will be looking to buy in hand over fist. But not until the panic has gained some steam.