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It is easy to get into a lull with the market. The memories of 2008 and 2009 have seemed very distant, even forgotten. The short, small correction in November also seemed like just a passing moment of time, something between surreal and imagined. In only two days and a few hours of trading though, all those memories come rushing back to traders. Calls for a crash, a correction, a retreat all come flooding into the market place. Equities have been overheated and due for a pullback, but is this a buying opportunity or the siren's call of a bear in waiting?
This pullback may be the start of a new consolidation trend with more sideways action and volatility than we've seen over the past six months rather than the end to equities as we know them. Of course, the start of any trend means an end to the previous trend, which was straight up since September. We did see one pullback very similar to this current pullback, and that occurred in November 2010. The SPDR S&P 500 (SPY)retraced about 4% of its bullish move. Currently, the market has dropped nearly the same amount over the past three days. Given the heightened political climate, it is very easy for the market to move past that level on this downward trajectory; however, I don't think the current move down will go significantly beyond support.
If the SPY were to mimic the November move, then shares could trade to around $128.64, which is right near current support of $128.79 in the form of the 50-day simple moving average (SMA). There is some support around $130.34 being tested today, but I would rather concentrate on the 50-day SMA. The move in November took the SPY to the $118 level, which is not an area I believe we'll see before March options expiration, so I want to use this level for the basis of a bullish InterETF spread. The spread will create a net credit I am then going to use to buy a bearish play much closer to the current price on the SPY.
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