A retest of SPY 140 is now obviously a possibility sooner than later; however, the usual suspects need to be considered on days like this.
The questions I would be asking are: What does the mid to low volume indicate? How much of today’s gains can be attributed to short covering? What’s the significance of overcoming the 50 day MA (for several of the indices)? Has the market become overbought?
And no, I don’t have the answers to all of these.
Investors are perhaps either trying to interpret some of the recent news as a turning point, or somehow had priced worse news into the current market price. With news from LEH and UBS, I know, that's hard to believe.
As usual I recommend making probability plays by identifying trading ranges and selling deep OTM. Price action is always unpredictable in the short-term but especially these days when movements are news driven.
I mentioned that the market might have becoming short-term overbought today. Having done some preliminary backtesting on this, using a 2-day RSI, I want to caution traders on blindly trading on this indicator. While RSI can be very predictive, its powers differ by stock, ETF, index, etc.
For example, over the last 500 trading days, if you would have shorted IWM ever time its 2-day RSI hit 95 and covered several trading days later – you would have been much more successful than if you had done the same for SPY.
Why? Who knows, doesn’t matter. It is just something to be aware of when doing your testing. Test multiple strategies on multiple stocks as some work better together than others.
I will post some specific results on these RSI tests in the future.
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