Market Holds Strong After Terrible Housing Numbers

Sorry, not able to post until now.

What happened this morning was picture perfect from a technical stand point, fundamentally it was suspect. The reason it was suspect in regard to fundamentals, was because the housing numbers were terrible, existing home sales were down 27% from last month coming in well low of consensus estimates. We were trading in the low 1050s at the time, right at the key support level I talked about. The market quickly sold off as panic set in. I actually stuck my neck out and bought at 1046.50 as I saw some buy orders flurry in. The market continued to tank another 2.5 points from my entry and I was a little worried, but because I was prepared (I outlined the possible scenario in the previous post), I didn't panic. I knew we had already traded down 50 points in the past few days ahead of the housing numbers which nobody really expected to be great anyway. Also you had guys like Cramer and every other mass media news source saying the market was going down further. They were the same people who said it was the perfect time to buy earlier in the month when we were at the highs. So I had the contrarian view point going for me as well. On top of that, I figured I could manage my trade effectively even if it went against me (which thankfully it didn't). It was nice to be in a trade that up-ticked almost immediately after my entry.

It was perfect technically because we had major support at the 1050 level. This was obvious support, so it was not a surprise to see a pierce of that support, a flush of the weak longs. I felt very confident in my position after we saw capitulation volume at my entry followed by a reversal candle with a long tail. These are tough trades to catch. You either get lucky or you are well prepared. And even though I was well prepared, I still didn't know the market would reverse there, it was just an odds play. It was a good entry because I knew if it did go against me, I could get out if I managed it effectively. Like I said, we had already come down 50 points since mid week last week, so further selling would have a high percentage chance of seeing a retrace at least back to my entry.

I am still holding the trade. This is one of the beautiful things about an entry like the one I got today. I can sit on it and not worry about taking profits. Don't get me wrong, it could still come back down. I don't like the fact that we have come back down to the low 1050s again. But I am still confident that the low is in for the day. And because my entry is so close to the low, I can hold on to this position. The last time we saw a capitulation reversal like today was back on 7/29. This was followed by a 40 point move up. I am not going for 40 points here, but my target right now is 1065 which is basically settlement or gap fill from yesterday. So there it is, my analysis of today's action and my trade.