Tough turn of events yesterday. The market responded positively to the extension of Bush's tax cuts, but in late afternoon trading it looked as if the ruling democratic party will attempt to kill the extension and stock prices came down hard in the last hour of the day. Positive market internals, which we cited yesterday, have reversed and have become significantly negative.
Open positions still look good here on both daily and weekly chart views. The Nasdaq and S&P don't look bad either, but the fact that new price highs were sold into is disconcerting. If sellers can follow through today, things could get ugly for even the best trade set ups.
Note: Today we are faced with one of the most difficult aspects of trading. When you build a few positions in expectation of higher prices and the market chooses to vote against you, it is natural to rationalize why the market is wrong. Thus, the tendency is to hold and hope that things will reverse back in your favor. We've done this on more occasions than we like to admit. However, the prudent thing to do when the market doesn't behave as expected is to work quickly to get back to neutral. This allows you to reassess future developments from a more rational, detached perspective. Today we are protecting ourselves from loss. This is key when probabilities don't favor either direction.