Market Conditions - Wednesday, June 8, 2011

The S&P 500 Index closed @ 1279.56 today.
We in the TSP Investment Club left the C Fund @ 1300.

Today was an interesting day. It wasn't interesting because the market was down. The trend is down, so down days are normal. It wasn't interesting because bad news is weighing on the market. In a down trend, bad news is cause for selling. It was an interesting day because the level of selling reached a critical turning point.

Normally, when the market is oversold, it will bounce. That is the sign of a healthy market going up. But sometimes, the selling just feeds on itself and gets stronger! That's right, there is a tipping point where selling begats more selling. One way to understand a tipping point is by a tool called "embedded stochastics."

What are embedded stochastics?

Stochastics are said to embed when the readings on a closing basis are below 20 (oversold level) for 3 days in a row. Some futures traders will use the third consecutive close where both the red and the black stochastics lines are below 20 as a sign to get short because the selling may accelerate as the momentum gets stronger and stronger. It doesn't always work (Exhibit A - July 1, 2010 close). But when it does, then it can be a great thing if you are short and /or out of the market.

Today was the third consecutive close where both the red and black stochastic lines were below 20. In fact, the condition was not a close call at all. The red stochastic line on the daily chart closed @ 4.11 The black line closed @ 1.97. The trend is down and has been since May 1, 2011. Today's close means the market is at risk of gapping down tomorrow morning.

In fact, the S&P futures this evening reached a low of 1269.75.

The market is behaving as it should. The momentum to the down side should accelerate.

Its a good time to be out of the market and just watch.

Later,

Wink

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