Two Intraday Reversals: Trouble Ahead?

Includes: DIA, QQQ, SPY
by: TraderMark

We've seen a sharp reversal in many of the leadership stocks. The same thing happened last Wednesday. Notice the late day selloffs both days in the 5 day chart below.

I have to tell you in "normal" markets that is a big danger sign. When this happened last summer and in mid fall, it foreshadowed some serious corrections. It seemed to showcase some trouble under the surface (potentially hedge funds blowing up and forced to liquidate positions to make margin calls). However, in socialized markets with the "Invisible Hand" [Jan 9: An Amazingly Blunt Commentary on the Plunge Protection Team] working it's magic, it is hard to know the outcome. Either way I continue to believe Risk is High, even if Kool Aid drinking is higher. If we were in truly 'free market' days I'd be worried about seeing 1 of these large intraday reversals; not to mention two in a week.

Again, the conditions are setting up here for the market's most wicked of mannerisms - doing the opposite of what many expect. The level of complacency has risen quickly the past few weeks (2 months ago we were wondering if Bear, Lehman, Merrill would exist, and if our banking system would survive, now 60 days later we are thinking unicorns and mermaids are ahead).

Individual speculators... err, investors are looking for which small-cap, no-name stock they can run in to, to drive up 40% tomorrow (instead of thinking about risk). It would be poetic justice in some ways for mother market to have drawn in the last remaining bears, forcing them to throw up their hands and go long - just as she was about to drop the hammer. Could it be that dramatic? We'll soon see if historic precedence means anything anymore. If so, these 2 intraday reversals are a shot across the bow.

After seeing this pattern again, I definitely will not be reducing short exposure going into the close. Risk just got a tad bit higher.