the Yuppie Pig

The market staged a huge late day recovery. Typically, momentum driven declines simply continue until sellers are exhausted or some external force presents itself to alter the psychology of the market. In March 2009, that was the banning of short selling and the coordination of mass liquidity into the market. Basically, the US Government along with efforts by other nations created a multi trillion dollar wave breaker to halt the tsunami of selling. On Friday, the market seemed to consider the possibility of such an event occurring again by a coordinated effort through the ECB to contain the European debt crisis.

Secret summit of top bankers

While I think it is still premature for such a large coordinated effort, one could also expect government officials to act much faster this time compared to last year. A late day surge in gold suggests that more liquidity is on the way. What remains to be seen, is any real action taken on the part of elected officials in the wake of increasing public backlash towards bailouts of financial corporations with taxpayer money.

Looking at the charts, we can see the huge intraday reversal. From the decline which began on Wednesday, this latest move does appear to be a strong impulsive upward move. Thus (on this time frame), I expect some additional upside movement to retrace some or all of this decline. There is some resistance just above these levels but a movement up to 1105 is a definite possibility we must be on the lookout for.

Looking at the short term 60 minute chart, we can really put Friday's reversal into context. In reality, it was quite small, and a market retracement back up to 1085 would be perfectly in line with maintaining this downtrend. Should the market weaken at that level, it is where I would look to layer in some short exposure with tight stops. These are the names I have under consideration. You can also see the most updated charts here. A move up to 1085 would only retrace approximately 38% of the decline. For Fibonacci fans out there, that would suggest a resumption of the decline and lower prices ahead.

Regardless, at this time, the trend is down and we must be weary of any long side positions at this time. The reality is that the market has given up about 8-9% after running about 73% from the March lows last year. Quite a few analysts and fund managers target a fair price of about 850 on the S&P500. While I've found valuation never to be a good reason on its own to go long or short, this could be a longer term target for mean reversion which could easily be overshot.

The uncertainty in Europe is the primary reason for this latest market route (The Obama administration isn't helping either) and as long as it remains, it is going to weigh on the market. There is no definitive timeline for it to end. We'll have to closely monitor world events for such a catalyst to end the uncertainty. (such as a massive intervention by the ECB) Other indicators would include reaction to earnings (CSCO reacted well) and of course - price action. Only then, do I think the decline ends and the potential for new market highs returns.