JPM Buys Bear for Two Bucks a Share

JP Morgan announced Sunday that it will be acquiring Bear Stearns for just two dollars a share. This will likely spur a downfall in the market on Monday as the economic situation continues to be proven worse than initially and commonly thought. However, the Fed meeting on Tuesday could caution shorts from being too aggressive.

We're now down three weeks in a row on the S&P and Nasdaq. If we get beaten down this week as well, I might consider buying the Nasdaq for a mean reversion trade. Typically, the broad indices bottom out (short term) after 4 weeks down in a row. This is a result of overdone negativity where sellers get worn out and overextended.

This market's theme continues to be sell strength and buy extreme negativity. This will continue to be the case until there is either signficant fundamental change or financials regain their leadership position.

Gap Lower; Reaction to the Upside

After gapping down signficantly on the open, the S&P is now breaking higher. It is coming right over its 50 and 20 sma (1 minute chart) strongly and looks set to move higher from here. We'll have to see if this can hold into the afternoon.

Here's a link to a great article that was recently posted on Quant Edges which states that buying gaps down (like this morning) in bear markets is a profitable strategy.
http://quantifiableedges.blogspot.com/2008/01/large-gaps-lower-in-uptrends-vs.html

Slow-Mo Move Downward

This morning I mentioned that the market didn't look too bad. Well that was true for about 45 minutes. The S&P rallied a dollar from where I posted but has since faded.

The S&P continues to drip down slowly. For anything to change there needs to be some panic or signficant fundamental change. The VIX hasn't moved up enough to indicate panic. I think that means there is more to go on the downside before any rally.

Watch the January lows. There needs to be a signficant reversal off those levels for the market to see any real upside in the coming days/weeks.

Rally After Gap Down

After a gap lower, things are really starting to heal up. The Nazz is leading and both the RSP (unweighted S&P) and XLF are outperforming the S&P by a considerable margin. I think things have gotten a bit overdone and we might be in for a bit of a rally here (i'm seeing one as typing). We're slowly moving towards positive, but I feel sure we'll get there if not more.

We'll have to see if this holds into the afternoon. Previous rallies have faded and this one could just as easily do so as well.

Markets Fade: Big Suprise, Right?

Once again, the market fades into the afternoon. We're now down 25 points on the DJIA and down nearly a point in the S&P after being up decently in the morning. Like I said in my earlier post, I expect any up day where the financials don't participate to fade. I continue to believe we'll drift lower in the coming weeks until we get some capitulation, a succesful test of the lows, or a big news item.

S&P Chops Along; Bias Downward

The S&P continues to consolidate. Financials are still weak (XLF is flat on the day) and it's obvious that there are no aggressive buyers in the market. To turn the market around at this point the bulls need a big washout (not just slow trickle down days) or significant fundamental news. The washout would have to cause panic similar to the drop that led to the lows in January. This has not happened yet. A shift in the fundamentals would really have to be large (ie government bailout of bond insurers) and credible, which could be the hardest part. Traders don't trust Bernake or Paulson, period.

The drops continue to be more significant than the pops. Everything participates in the downside fade but only a select group participates in the upside.

Resistance on the S&P is at the 50 sma, right where it bounced of on the last advance. Support is at the January lows (1275ish). Continue to watch for tests of those levels and trade accordingly.

Cover VAR Below 51

VAR is trading right around 50.89 right now. I'd look to cover the short right here or lower for a couple quick bucks in profit.