A Feeble Rally Attempt

[Excerpted from Bill Cara's Daily Report]

CTA trader’s conference call notes:

As suspected, a “feeble rally attempt” early Wednesday morning would attract professional selling, yet even we were surprised just how weak the opening bounce was; a measly couple S&P points, lasting all of 5 minutes. For most of the session, sellers clearly had the upper hand with the broad market knifing below the 200-day Moving Average (S&P 885) in mid-morning, subsequently taking out chart support at 880, sending institutional buyers to the sidelines.

Although high-beta stocks like Apple (AAPL +1.32%), Google (GOOG +1.88%), and Amazon (AMZN +2.47%) attracted bargain hunting, money flowed into defensive sectors such as drugs and pharmaceuticals, rarely a sign of a healthy market. Moreover, US treasuries saw significant buying (TLT +1.64%), with buyers literally chasing bonds after results of the 10-year auction were released around 1:00pm ET. We view this run-up in bonds as unsustainable, and used this “flight to quality” ruse as an opportunity to re-establish bearish positions on bonds, looking to further increase short exposure if treasuries continue to rise.

While crude oil (USO -2.99%) was weaker again, oil stocks were resilient all day, shaking off early weakness, firming into the close. This subtle change in behavior, we believe is a tip-off, the recent slide in the oil sector is now over-extended, favoring an interruption of the downtrend. With many oil stocks oversold, tagging support, and implied volatility rich, a very favorable risk-reward scenario exists for selling short-term puts; we alluded to this situation yesterday, and took advantage of the rich premiums today to initiate short gamma positions.

Although support on the S&P was violated, we remain leery the “obvious” head and shoulders formation will quickly lead to painless profits down to the 810 area. With short term technical traders leaning short as 880 was taken out, it seems logical to prepare for an upside whipsaw perhaps to the 925 area, frustrating as many traders as possible, before the real correction begins.

There are no certainties in trading, only probabilities; learn to be a card counter and get the odds on your side.

Have a great day. Mine has been a little rough so far. I wasted two and a half hours trying to learn how to program tables into this blog. Hence, the omission of a full Daily Report, again.

Comments

[Fitz919:]

"A Feeble Rally Attempt" is right. And how many little banks are going to fail tomorrow night? About half a dozen would be my guess.
Two weeks ago 5 failed, and last week it was 7, I'll say 6 this week.

Anyone else have a guess?

Jul 09 08:45 PM