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Has The Plunge Found Support Or Is It Just Getting Started?

What looked like a glimmer of hope for the bulls at Tuesday’s open, quickly turned south, driving the S&P 500 once again down to the “psychologically important” 2800 level. If you’ve been at this long enough, it’s pretty clear that any level deemed “important” must have an enormous amount of sell orders just beneath it. And it stands to reason that the market, by it’s design to frustrate most of the people most of the time, must sweep all of those sell orders before it can resume any kind of upward trend.

The question on everyone’s mind, though, is what happens after that?

Well, a further plunge below the 200 day moving average is certainly a possibility, but including today’s dive, the month of May has racked up no less than 5 across-the-board distribution days (remember the good ole “Sell in May” adage?). A -5% decline off the highs in price brings out the bears in droves, hungry for more, but big institutions have already sized down their positions much more than can be seen on the surface (When S&P 2800 comes, they’re already long gone). And looking at the vertical but slow rising spike on HG today, the thought of capitulation just before the end of the month crosses my mind more than just a bit.

Despite all that, we did trim a long call position today from last week for an -18% loss. Even though the argument for a reversal here seems to be the stronger one, exit rules are part of the system for a reason and we follow them accordingly. Whether you think you may be right or not, taking on too much risk is not something to be taken lightly. -MD

Sentiment: SKITTISH – Market distribution is heavy and aggressive and big institutions are selling to preserve their capital.

Volume: 41% – Today’s volume was higher than the previous session.

Real Feel: SWELTERING – Bears were in control of the session with a slight trace of buying under the surface.

Cycle: BEARISH II – Retail investors are dumbfounded and are rapidly exiting their holdings.

Portfolio: HOLD – The market is in a period of indecisiveness and the best place is on the sidelines.

Next Day Move: SIDEWAYS DOWN - The probability that SPY will close positive in the next session is 52%.

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