The S&P dropped more than 2% Thursday and the Dow slipped back under 12,000 after the European Central Bank disappointed quieted talk that it planned further debt purchases and admitted that European banks would need to raise capital. Banking shares took a big hit as a result, which we have said all along is the key to a sustained rally. The biggest losers were Morgan Stanley (MS), which was down 8.4%, and Citigroup (C), which was down 6.9%.
The promise of sweeping intervention in Europe had driven the market higher over the past two weeks, but the S&P was unable to break above its 200-day moving average on four occasions. Traders identifying a bull flag pattern are left frustrated by what has become a thin and dangerous tape. Short-term momentum players will need to continue to remain on their toes in this slippery environment.
When you trade for momentum, you have to stick to your targets and your stops strictly. You take trades or take losses when momentum leaves. The first red flag was the push-through failure pre-market in the $127.20-127.40 zone this morning. Then the upper bull flag broke when we broke below $124.97 in the SPY this morning.
If your trading with a longer term thesis, you probably can stand pat today. The S&P is still above the November 30th gap. If you use SPY as a vehicle, the gap starts at $123.22 and the 50-day stands at $123.40. If that level holds, it will be constructive for the market.
The 38.2% Fibonacci retracement of the move from $116.20-127.20 stands at $122.77. If this level holds, most of gap is still intact. The 50% Fib retracement of the same move is $121.40. If we only hold this level bullish composure would technically remain intact, but with less enthusiasm.
It’s hard to use an exact science when everything changes with a headline. This makes it a very dangerous environment to trade. Either you need to be an active short term trader or have a long term macro plan.
*DISCLOSURES: Scott Redler is flat
