Let the Indicators be Your Guide

Pilots understand that when flying through a storm they can’t rely on their feelings and they can’t rely on what they see through the cockpit window. In order to fly safely through the storm they must depend on their instrument gages to tell them where they are at in relation to the horizon.

Last week, the SPY moved down to its lows and then bounced weakly later in the week. This caused a lot of traders to buy in thinking that the market was ready to carve out a double bottom.

We warned, however, that the B-Band support and the 50-week average were continuing to decline to lower prices and we argued that this meant that the market was not stabilizing as it might have appeared late in the week. Likewise, the sentiment readings remained stuck in neutral.

The Risk Assessment Meter is our gage that helps us navigate the storm. Appearances can be deceiving but indicators that continue to decline showed us that the upside move was not to be trusted and that only the short side offered good risk management potential.

Indeed, today the market responded to the LEH implosion and a potential destruction in AIG.

As we mentioned a couple of weeks ago, the $117 level is likely going to act as a magnet. In fact, with the ferocity of the decline today there is some potential that we will see the SPY make an intraweek low as far down as $113.

Tomorrow the Fed meets and there is some talk of a .50 basis point rate cut to stem the tide of selling. How the market responds to this is just about anyone’s guess. If the Fed does make a big cut and the market responds favorably, it will no doubt just offer up another shorting opportunity at higher prices. This will continue to be true until the indicators start to stabilize and they certainly aren’t there yet.