It´s been a week since I´ve posted some of my views and here we are with one more gap under the belt. The rally hypothesis did indeed play out and the SPY sits with a 5.44% gain for the period.
The 100 point rally has left 3 important gaps with an average size of 13 points each. The nature of this move shows the result of important developments during the European session, which provided continuation during the US session, beign supported by almost a continuos trend with dismal pullbacks.
The index has regained the 126 level, which works like a line in the sand between a more sustained move to the upside, or heading back into bear territory. Still, I would like to see the SPY maintaining the 129 level to be biased towards a new uptrend.
As for the longer term view -if of any use in this headline-driven market conditions, still too early in the month to tell. The first trading day of December left the S&P500 index sitting above the 20EMA, which is a bullish signal, according to the long term model. The 20 month EMA, is currently sitting @1257, with a positive slope. I´ll be monitoring this during the week and due to the volatile circumstances in which the market is inmersed into, and will probably post an updated chart at the end of every week, to see if we can gather some information from its readings.
Looking at the closer picture, the -messy- chart below shows an important development from last week. We can see that back on Friday, November 25th marked an inflection point when levels of short inventory reached their peak, only to be unwinded in the following week, which explains in my view the underlying nature of the rally: short inventory being squeezed by longs gaining momentum (aka short cover rally).
Important to note is the fact that long positions only committed on Monday, November 28th, as marked in the chart. There´s still quite a bit of short inventory above, which could create more fuel for a second leg of a rally. However, this new rally scenario is being threatened by the existence of short positions, which have in fact increased today at the peak of the rally, near the 1266,50 mark on the ESZ1 -although close from rollover date, volume is still dismal in the ESH2, March 2012 contract.
This is noted by the negative divergence between price and the Cumulative Delta. if this divergence persists and gains momentum, the ES could eventually face a pullback. The extent of it, would be conditioned by how many more positions become committed -or not- to the short side.
Thus, both of the possibilities I´ll be keying in tomorrow.
Level wise, the chart below shows the levels I´ll be watching tomorrow. As always, take into account when reading this blog that those levels might be breached overnight. I´ll try to post charts during the pre-market, although it is not always possible for me to do it.
Inmediate support @1243-1246
Inmeadite resistance @1264-67
Hope this is of any positive use for anyone who reads it.
(photo courtesy of sbcskier.com)