Reading the Tea Leaves

posted Oct 24, 2014, 11:53 AM by Katie Shook   [ updated Oct 24, 2014, 11:53 AM ]

Technical levels are still critical — yesterday the markets had a strong move to the up-side.  The problem is that the technicals aren't ‘technically’ improving yet.  They’re better.  But there are also some key concerns.  The SPX hit the 200-hour moving average yesterday and failed to push higher.  It’s also tapping at the door of the 50-day moving average.  Both of these are significant.

Take a look at the underlying positions within the indexes as well.  One look at the database will tell you we still have 69% of all symbols with sell signals.  That kind of embedded downside volatility doesn't just fade away overnight.  There has been damage to the market’s psyche.  It may feel warm and fuzzy that we've had such a hard reversal off the 1820-low for the SPX, but that doesn't mean all is well…  yet.  Until we start to see new buy signals in the system prudence demands caution.

The other wild card out there (as if there’s only one) is the re-kindling of the Ebola scare.  The ES dropped about 15 points in 2 minutes last night at the announcement that a physician in New York tested positive for the disease.  Cue the next sh*t-storm of paranoia and political promises for how we’ll manage this one.  Regardless of the reality that we’re unlikely to face a true pandemic in our country, expect money and over-reaction to get thrown at this ‘problem.’  In the process there’s likely to be some valuation fall-out if we don’t nip it in the bud early.

All told, it looks like the bias will be to go into the weekend neutral.  If this is the case, it’s likely we’ll see some selling pressure later in the day.  The key level to watch on the SPX is likely 1942.  Should the markets, by some mystery, decide to head north, the key resistance area will be the 50-day mark at about 1966.  I think the test of this level is pretty unlikely today though.  We've had positive move in the last several days we’re likely to take a commercial break to capture some profits.

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