Market Holds Onto Overnight Gains, but Action Unconvincing

The S&P finished Monday up nearly 3% following a strong start to holiday shopping season and optimism about further intervention in Europe. The Nasdaq was even strong today, finished up 3.5%. Stocks closed about where they opened thanks to a late surge into the close.

Although stocks did technically hold onto most of their overnight gains, the action was unimpressive. After an initial surge off the open, the market trended lower most of the day before the push in the last five minutes of the day.

The S&P hit $120.18, which wa in the high end of Resistance zone #1 that I outlined this morning. Intra-day traders do not like this type of gap up because it takes away the meat of the trade. It was hard to buy this market after a nearly 3% gap up, but still hard to short knowing that many shorts are trapped and there are whispers of intervention in Europe and from the Fed. You need to be a surgeon to have any chance to make money in either direction after a big gap up from oversold levels.

Banks were some of the biggest winners overnight, which seemed to hint that market intervention could be coming. However, the group showed relative weakness during the session and did little to show that a bottom may be in. There were small pockets of stocks that did break above the morning 30-60 minute ranges, but they were not easy to find. They also failed a bit later in the day.

Sina Corp (SINA) gave some nice two way action today. The stock broke violently to the downside after an article in the Chinese Wall Street Journal suggested the company could be the next target of short-selling research firm Muddy Waters, but then rebounded sharply when Muddy Waters tweeted that it was not preparing any such report on SINA. Despite the clarification, the stock faded after the reflex bounce. Even without the early talk, SINA had been showing relative strength and looked prepared to break down. It was merely pushed off the cliff by the misconstrued report.

Molycorp (MCP) exploded higher early in the day following an official announcement that it has entered into an agreement with Daido Steel and Mitsubishi to manufacture sintered next-generation neodymium-iron-born (NdFeB) permanent rare earth magnets. The stock still gave some good entries after the news and initial pop.

Although there were selective opportunities out there today, I think it is more prudent to keep risk low and wait for better opportunities. The market has a lot to prove, and today’s gap up was not based on any really solid news. The market has proven its ability to bounce on low volume very far on light volume before again selling off, and investors will surely be wary of this scenario. The Oscillator went from -100 to -45, so we still have some room to work off the oversold readings in this market before perhaps weakening again.

By John Darsie

Disclosures: Scott Redler is long SPY, AAPL, and AMZN.

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