Bouncing Off The Support Level—Major Market ETFs Stage A Rebound

You never know if a white knight can suddenly appear with enough powers to pull the major indexes out of a deep hole. That was the case today, as the S&P 500 was bouncing around its major support level of 1,140, which was briefly violated, when news broke that Italy is talking to Chinese Investors about buying some of its bonds.

At this point, the news has not been confirmed, but Chinese investors did travel to Italy to discuss various investment ventures. Just the possibility that this visit could morph into something more was enough to put a floor under the markets, and up we went, as the chart above (courtesy from MarketWatch.com) shows.

Of course, those types of rumors can end up in disappointment while leading to a dead cat bounce with the markets potentially retracing today’s gains. But, for right now, the Chinese saved the day, at least for the domestic U.S. market.

It looked different on the European side, where equities continued to slide on concerns of Greece defaulting at some point in the future.

Our Trend Tracking Indexes (TTIs) remained steady thanks to the pullback and are positioned as follows:

Domestic TTI: +0.83%

International TTI: -12.70%

Within the last month, the S&P 500 has been trading in a range of some 100 points with the upper level being around 1,220 and the lower one at 1,120. That is a wide margin, but helps understand that we really have been stuck and not been able to break out.

This obviously did not help our hedged position, because a downside break occurred, but due to no follow through, we headed back up to the upper end of the range. While that has been frustrating, there is not much you can do about it.

Any trading in a range will come to an end sooner or later and a break out will occur. Of course, you can’t be sure whether it will be to the upside or the downside. I consider it a downside breakout when the Domestic TTI turns negative again.

Since I am more concerned with controlling downside risk at this time, I will initiate the hedge again once the downside break has actually occurred.

With some analysts having reduced their 2011 forecast on the S&P 500 to 1,180 (we closed today at 1,162), your concern should be to protect your portfolio, if more downside comes into play. At least that’s how I see it at the moment.

About Ulli Niemann

Ulli Niemann is the publisher of "The ETF Bully" and is a Registered Investment Advisor. Learn more
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