The End of the Rally? S&P Reverses Course at 50% Retracement

The End of the Rally? S&P Reverses Course at 50% Retracement

Stocks gapped higher at the opening bell this morning on news that China would (slowly) allow the Yuan to float.  The “Renminbi Rally” was to be short lived, however.  The S&P briefly stuck its nose above the 1130 mark, and quickly reversed skate to finish the day in the red.  Volume was anemic, once again.S&P 500 Stock Price Chart June 21 2010Is the S&P’s mini-retracement over at the 50% mark?


When this rally kicked off in late May, we thought the S&P would likely rally as high as 1123…though we held out hope that our friend Jeff Clark was correct in predicting an 1130 ending point.  On May 27th, Jeff wrote:

Over the next several days, the S&P 500 could rally back up to 1,100 or even 1,130 if the bulls really take control.

Remember, though, dead cats always fall back to the bottom. Once we get a bounce in stock prices, we’re likely to come back down and retest the lows.

As a trader, I’m playing stocks from the long side right now. But I’ll be quick to take profits and I’ll be looking to short stocks aggressively if the S&P rallies back toward 1,130.

After being forced to cover my previous ill-advised short at a loss, I again shorted the S&P during this morning’s bounce (@ 1119.50 via Sept S&P mini-futures).

So far so good on this one – I LOVE this as a potential short entry point.  Though this rally took awhile to get started, it eventually carried out in a fashion pretty well aligned with our original playbook.

The weak volume numbers on the rise add to my confidence that the next turn should be down.  We’ll need to see price, and preferably price AND volume action, to confirm that the downtrend has resumed.  But all indications show we could be on the cusp of a significant reversal.