Stocks opened almost 200 points higher yesterday, answering the question,
"What would the market do if good news occurred?" The good news that caused
the big opening again had its source inEurope, as their appeared to be an
agreement on how to handle the complex financial issues that threaten to destroy
the EU. But when it was clear that not all members were in agreement,
theU.S.stock markets gave back a substantial amount of the initial gains, but
still retained an increase of about 1.2%. Volume on the NYSE totaled 1.2 billion
shares, and the Nasdaq crossed almost 600 million shares. Advancers led
decliners by 4-to-1 on the Big Board and 3-to-1 on the Nasdaq. Yesterday I
provided charts from October 2008, illustrating how the high volatility of a
typical bear market rally could dissuade most investors to give up their short
positions and go to the long side only to be whipsawed with losses on both short
and long positions. The above chart of the S&P 500 shows that the next area of
resistance to the current bounce is at the 50-day moving average at 1,208
that's over 7% from Thursday's close. If a trader had taken a position in a
3x inverse index ETF on Thursday's close at 1,130 and held the position
through yesterday's close at 1,175, his current loss is about 12%. And if he
continues to hold until the rally reaches the first resistance, he would be
under water by over 20% and no doubt thinking of selling, going long, or even
worse, doubling up.
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