Momentum Extra: Preparing for the Potential Tsunami Reversal. An ETF Trade Designed to Catch a Rising Wave.

We want to be ready for this market to surprise to the upside.

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Market Update

Given the pent up angst and pessimism that has accumulated during this decline, when market turns up, it will likely do so with the force of a tsunami. And as responsible traders we want to be ready for that event, while soberly weighing the risk/benefit ratio of any decision.

Thus, I am not predicting that the bottom is in. Certainly, a lot could happen at any time in a fickle market fueled by fear in an unpredictable geopolitical and economic environment. Yet given the level of pessimism which is present in the markets the odds favor some sort of bounce sooner rather than later. From a trading standpoint, it pays to be prepared. Thus, I am adding a trade this morning which will help us catch the initial rebound as we sort out when and where we start putting more money into individual stocks.

Yesterday, I suggested that it was “time to get a bit contrarian, put on our value seeking goggles and start picking through the rubble.” And this morning’s partial rebound behind a better than expected (but not all that great) CPI number suggests that we may have seen the worst, although we’re not totally out of the woods. That’s because even though there is plenty of pessimism in the air, investors are still shellshocked after the relentless selling spree we’ve just gone through.

Certainly, there have been some geopolitical breakthroughs of late which are encouraging. Yet, it’s too early to tell whether they will stick. Meanwhile the situation in Washington continues to roll, raising economic uncertainty over job losses inside the beltway and their repercussions.

Here is the checklist of where things stand:

• CNN Greed/Fear index: Extreme fear with a reading of 17. The low yesterday was 14. This is as bullish as it gets.

• The S&P 500 (SPX) tested the 5550 level yesterday but closed above it. This morning, SPX survived another test of this level. This is encouraging, but not a guarantee that the worst is over. A decline below 5550 sets up a test of 5450. There is no meaningful support below 5450 until 5150-5250.

• The CBOE Volatility Index (VIX) has retreated after matching its December high just below 30.

• The CBOE Put/Call Ratio hit 0.95 yesterday. That is far from a Super Selling Climax reading.

Market Update

The New York Stock Exchange Advance Decline line (NYAD) is still below its 50-day moving average and after an initial bounce earlier this morning, has turned lower. It’s still early in the day, but if NYAD doesn’t show signs of recovery by the end of the trading day, it would be a sign that the bottom is still further out into the future. The positive side of this situation is that NYAD is trading outside its lower Bollinger Band, which means that at some point it will turn around. When it does and establishes an uptrend that will be a very strong sign that the odds of picking winners are rising.

The U.S. Ten Year Note yield (TNX) is back above its 200-day moving average, still stuck between 4 and 4.5%, but showing signs that it wants to climb even as the CPI number was better than expected. That’s certainly worrisome.

Meanwhile, the S&P 500 (SPX) is holding above 5550. If SPX fails to hold above 5550 by the close, expect more selling, which could lead to a test of 5450.

This morning, I am adding a new trade featuring a leveraged ETF which should provide sizeable gains if this turns out to be the market bottom.

Thanks to everyone for your ongoing support. I really appreciate it.

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