The rally yesterday was very impressive to say the least, however, the lack of follow through today confirms the fact that most of that move was Uncle Ben and the FED trying to prop the market up.
Typically these interventions do more harm than good and while I do expect a bit more on the upside, we need to be very careful in here.
The S&P has not completed its 5 wave down structure as the NASDAQ has and remains very vulnerable to any downside pressure that may be exerted. The move off the lows is clearly counter trend and should have a very limited life with an upside target of about 50 more S&P 500 points. This would put the S&P at 1356 basis the cash index.
Should we see the 1356 area coupled with a pre-mature turn down in the stochastics, then we will have a set up to purchase puts and portfolio protection if you wish for the last leg lower before the market finds its first long term level of support. Expect the first level of solid support to come in at the 1226 level on the S&P 500 cash index. From this level and the right environment, it should be the time to increase our exposure to equities for the coming counter trend rally which could be quite strong.
Aggressive traders can look to capitalize on the decline by purchasing the April 128 SPY puts in the .80 to .85 area. Currently they are trading at right about 3 bucks.