How to Trade With an Accelerating Warning Phase

June 14, 2011

Mish's Daily

By Mish Schneider

A very welcomed trading day today with the gap higher, follow-through and an opportunity take profits long the way with very little pain. But where does that leave us now? SPY closed up 1.3% but without an Accumulation day in volume and certainly worked off its oversold condition. On the daily chart, it rallied right up to the 10 day moving average closing just beneath. On ETF's and indexes we like to use the adaptive moving average so it is possible that we could trade above 129.50 again tomorrow and get up to the adaptive moving average resistance. Today's rally did nothing for volume pattern nor for the slope of the 50 day moving average which is still decidedly negative. In fact, it sloped down further than where it closed yesterday.

QQQ had a nice bounce off the 200 day moving average and did indeed post an accumulation day in volume, which makes a better case for a possible continuing rally albeit with the knowledge that overhead resistance exists first at the adaptive moving average and then continuing up to 56.50. QQQ also has an accelerating downward slope of the 50 day moving average.

IWM also had an accumulation day in volume and also has overhead resistance beginning at 80.75 to 81.00.

DIA which was our strongest index yesterday today disappointed with less volume and only a 1% gain rather than the 1.3% gain as in the other indexes and in the case of IWM a 2.3% gain.

The US dollar weakened against the Euro once again today but could not penetrate the resistance at 1.44 to 1.45. Therefore, I would continue to watch how this performs tomorrow which should continue to have a direct impact on the overall market. Below 1.42 should bring pressure into the market and above 1.45 and easing of any pressure.

Looking at the energy and oil sectors, appears to be more of a short covering rally than anything else. Plus, whereas they were oversold prior to today, they now have completely worked off any oversold condition. Looking at XLE if it cannot clear today's high and fails, especially if the dollar strengthens, then I would not be surprised to see renewed selling.

SLV ChartAt this point, looking at today's rally as one that could get a bit more follow through, but the overall phase continues to indicate an accelerated warning  and a possible opportunity to look once again at establishing short positions. The question will remain on whether or not we have another day of upward momentum to test that overhead resistance or we begin to roll over right away.

Quite simply, I would look for opportunities to short SLV, energy and oil, and real estate. Otherwise, other than looking for individual stocks that have good daily chart setups with minimal risk to buy, I would not be chasing any of the indexes or ETF's to the upside right now. I'd rather wait to see if selling comes in, how much and then, if we hold recent lows, use short term trading patterns to re enter from the long side.

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