Returning to the Scene of the Crime

This morning's selloff to the bottom of Monday's gaps was just what the doctor ordered -- yes, this doctor -- to set up a short-term buying opportunity. The pullback bottomed right where it had to in order to fill several of Monday's gaps -- or in some cases, almost filling the gaps -- while in most cases holding above last week's lows. It was perfect ... well, almost perfect.

True, there was one gap that didn't get filled. That occurred in the S&P 500, where the little gap from Monday was just 1 point, from 1044.38 to1045.38. The morning low came in at 1046.47 and it bounced from there. So, if you were waiting for that gap to be filled before doing any buying, you didn't do any buying and you are still waiting.

S&P Futures Close enough to filling Monday's gap Source: Lind-Waldock

On the other hand, the S&P futures neatly telegraphed a low in the market as it pulled back well inside its gap from Monday at 1041.10-1043.80 and in the case of the E-Mini almost filled the gap as the futures bottomed at 1041.50. In the S&P futures contract, the low was 1041.90, and now it's popping back up into positive territory after holding well above last week's low of 1036.30.

As you might imagine, I was selling puts and buying mutual funds into that shakeout into that gap as several indicators were calling for another near-term low. At Rydex Mutual Funds where I am stuck with the 10:45 a.m., pricing I was a buyer at 1048 in the SPX and 599 in the Russell 2000.

Nasdaq 100 (NDX) Filling Monday's gap and holding just above last week's lows Source: Lind-Waldock

Other than the SPX, just about all the other cash indices pulled back into Monday's gaps and uniformly filled those gaps, signifying a near-term low. In fact, in the case of the Nasdaq 100 (NDX), Russell 2000 and Nasdaq Composite, not only were Monday's gaps completely filled, but last week's lows were probed and narrowly held.

Dow Jones Industrial Average Holding where it had to Source: Lind-Waldock

The Dow actually made a slightly lower low at the 9609 level (below last week's low), but bottomed in its support zone marked by the prior November highs and the Nov. 5 gap. That wasn't a bad sign either.

The bottom line is that Monday's gaps were generally filled during this morning's pullback, and this of course takes care of that bit of unfinished business on the downside -- the obligatory "return to the scene of the crime." For several reasons, a further rally should be in store ... though as the market pops back up, I am now hedging these bullish bets in my option accounts by selling some out-of-the-money November 113 calls in the SPDR Trust (SPY - commentary - Trade Now).

---

At the time of publication, Schiller was long SPX and Russell 2000 funds at Rydex up to 20% levels; bullish credit spreads in SPY December puts and bullish call spreads in October calls as well as bearish call spreads in November calls, although holdings can change at any time.

Dr. Harry Schiller is a Registered Investment Advisor with the California Dept. of Corporations. He holds a Series 7 General Securities license as well as a Series 4 Options Principal license. He has been owner and editor of the Short Term Consensus Hotline since 1988. For more information, see www.harryschiller.com. Under no circumstances does the information in this commentary represent a recommendation to buy or sell stocks. While he cannot provide investment advice or recommendations, he appreciates your feedback; click here to send him an email.