How Do We Trade After Yesterday?

by Ryan Mallory

For anyone who was long in the market yesterday, if you were using stop-losses to mitigate your risk, you were likely stopped out of those trades. In all my years of trading I honestly cannot ever recall a time where the market acted as crazy as it did yesterday. In fact, there was one point in the trading session, when we rallied off those lows 700 points almost, where I wondered whether we might actually finish green on the day. I've just never seen intra-day action like yesterday.

I think there are a couple of views you can take on the market today. First, you can assume that since all the stop-losses were taken out, that the weak hands have been eliminated and all you have is a bunch of perma-bulls remaining, and since there are no stops beneath us to drive this market lower, all we can do going forward is rally.

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My personal belief is this, that the debt problems we are seeing with Greece is only the tip of the iceberg of a bigger problem involving many other countries as well, and what was seen with Lehman Brothers and Bear Stearns will be microcosm to the degree of problems we will see if other countries start defaulting - the panic in the markets will be widespread and who will bailout who at that point?

These small european countries, like Greece, cannot depend on the United States to bail them out either (a popular theory out there), especially considering the debt we are under, and the number of people in our country who don't have jobs. The people of our country would never put up with the US bailing out other countries, and if the current administration started doing so, a literal revolution would probably sweep the streets of the U.S.

Going forward, I am all cash right now, I am going to let the market do its thing for the first 30 minutes to an hour, and may at that point, especially if the early morning gains still holds, initiate a large short position on the S&P. I have little faith that the rally we are seeing this morning is truly a recovery, and not a dead cat bounce. There is a lot of technical damage on the charts, and it makes sense to me to believe that we are going much lower in the mean time.

By the way, my apologies for not posting much this week, as I have had a lot on my plate recently, but will be looking to get back into the fold  next week resuming business as usual. Happy trading!