Wednesday, February 23, 2011

Libya, the Middle East and the Stock Market

The events of the Middle East -- first and foremost -- are reminding me of the democratic changing of the guard that occurred in Eastern Europe. Watching the events from afar is fascinating and scary.

More importantly, these types of events can cause fundamental disruptions to the stock market as they cause a realignment of trading strategies. Here are some general points to look for.

The US markets have been in a strong rally for some time. The A/D line has been rising and the CMF confirms an inflow of money in the market. But this type of event could be the catalyst for a correction. Yesterday, the SPYs fell to the 20 day EMA. The next logical area of support is the 50 day EMA, which is currently at 128.55, or 2.5% below current price levels. A sell-off that stops at this level would be a baby correction. I've drawn support lines -- most of which occur near round numbers (click for a larger image).

Finally, remember that sell-offs are good things, as they weed out the shaky longs.