Possible Gap Down on Wednesday

Watching the early morning market on Tuesday was pretty much as expected, markets all over the world were rebounding from Monday’s huge lose and so was the US market.  The Dow jumped 75 points out of the gate while the NASDAQ Comp pushed up nearly 28 points or nearly 1.5%, quite impressive gains for the opening.  After the open, though, there didn’t seem to be any follow through to the upside as the market just sort of treaded water for several hours.  This being the beginning of a “bounce” should have been a strong affair with power generated from shorts covering as well as out and out buyers.  What was going on?

We expected a late day surge to take out the morning highs but this did not happen.  There were several headlines crossing the media about the Fed head Bernanke and the comments he was making about the future of interest rates.  We don’t buy the argument that the market dropped because of those comments.  If the market wants to rally, the market will rally.  If the market is oversold as it currently is, the rally could very well be spirited as shorts have to cover pushing prices up quickly.

What did happen was that prices reversed course late in the day and ended down.  This is not really what a bounce is supposed to look like and it leads us to wonder if the market wants to go down hard right now.  The market is oversold which is the time we see normally would see some fear and selling.  One way to explain it is that there are two things that can happen at an oversold point.  First, the buyers step aside and say that prices may come down some more so I don’t need to buy right now.  Second, the sellers start to panic a little and sell into the weakness.  The whole scenario is sitting there tonight after the late day sell off.

Here’s our analysis for what it’s worth.  We said that a normal correction would be about 200 points.  Tonight we can quantify the number a little better.  The drop in the Dow was from 11,670 ten days ago to 11,040 yesterday or 630 points.  Today’s rally took the Dow up to 11,202 for 162 points or a retracement of 25.7%.  This is enough of a corrective rally but the normal amount would be 38.2% or 240 points or 50% for 315 points.

The market is oversold which makes us nervous about the Wednesday.  The after hours trading confirmed our thoughts that the market wants to drop tomorrow so we are looking for a gap down in the morning with the possibility of a very negative day on Wednesday.  If this scenario does not play out the way we expect, we will rethink our position in our next post.  But, we are very glad that we are out of the market and a little short.  We repeat, the market is oversold and very vulnerable to a huge sell off.  

There are a couple of big reports due out on Wednesday, the durable goods and, one of our favorites, the April new home sales.  Expectations are for declines in both of these, with durable goods down 0.1% and home sales down 3.5%.  The market may find solace in weaker numbers but that is not guaranteed.  

Monday, the global markets were aggressively sold and Tuesday, they bounced back strongly.  In New York, the story will continue on Wednesday.  It should be quite a ride and we will be back tomorrow to recap the action.

Be careful out there…

Dow Industrials:  11,098.35  -26.98
RYVNX:   21.73
RYAIX:  23.85
TLT:  84.56
BEGBX:  13.62