End of Month Buying Window

We are into the end of the month buying window and even with the market well into an extended run don’t discount the power of the monthly buying spree. This is when 401k monies and other monthly retirement deposits are added to the funds. Moreover, since several indices are just a few points shy of all time highs these fund managers are going to feel the pressure to get fully invested or be prepared to answer some tough questions about why they doubted the market during its best run in 9 months.

Market Outlook Promising

We are starting to see some very solid bullish activity taking place. Yes indices are extended but since we are not trading the indices it is the performance of the underlying stocks that is most important to us. Last August market indices took a strong ride up that lasted into late December. During that market rally the performance of underlying stocks generally did not reflect a strong correlation to the activity of the indices themselves. Breadth was weak and the rally had a much greater effect on blue chips than it did on small caps. During the late 2004 rally our performance was moderate at best and we stopped out of our fair share of failed breakouts. Flash back to 2003 during which the market trended solidly higher throughout the year. During this rally breadth of underlying activity was strongly correlated to the strength of the indices themselves and small caps led the way as blue chips lagged. In 2003 we were enjoying months of 20% and more gains consistently. Now, step forward again to this current rally. It is beginning to “feel” a lot like early 2003. We are not seeing breakouts fail. In fact, we are seeing stocks take off without pullback. And, while indices themselves become extended, we are seeing profits skimmed off the top being redistributed into lagging stocks. Stocks like CHTR, which have been in long drawn out tail spins are now getting squeezed. We are not completely there yet, but the outlook for a projected repeat of 2003 is shaping up rather nicely; and hope for this repeat is not without foundation.

Rotation Taking Place

We were pleasantly surprised by the results of today’s scans. Yesterday we mentioned that results provided a pattern of neutrality rather than a pattern of strong set ups. Today we did find a pattern of strong set ups starting to emerge. This comes on the heels of market indices, which are extended and ready to pull back. What does this mean? We think that we are seeing profits taken out of recent gainers being repositioned into lagging stocks. In other words, while round one stocks rest and consolidate gains, round two stocks are gearing up. If this pans out the way it looks like should then we are seeing behavior very similar to that experienced during the uptrend in 2003 and that which was sorely absent over 2004 when stocks were grinding sideways. We will continue to update on this development as it progresses.

Think About Trailing Stops Here

What can we say? The market refuses to pull back. There is not much we can do but sit back, buckle in, put in trailing stops, and wait for new entry set ups once the market comes back to reality. We are enjoying the ride and are pleasantly hopeful we will see many more opportunities develop in response to such a strong market reversal.

Still Looking For Consolidation

Scans today seem to point to a bit of consolidation or pullback over the next few days. Tech has been strong but it needs a rest. The most bullish scenario here would be to start seeing some sector rotation as profits from tech’s recent run are reshuffled into some of the underperforming sectors. This hasn’t happened yet, in fact we haven’t yet seen much profit taking in tech. There will be stocks that continue to go up over the next few days, but determining which ones have the highest probability to do so is stunted without some consolidation.

Rally Has Legs

Options expiration came and went with little event this month. The market ignored maximum pain values and trended hard, capturing new gains seven days in a row now. It’s hard to take a position when the market refuses to pull back. Don’t fear though; it will pull back when everyone sitting on the sidelines finally give up patience and cast in their lot. There are all kinds of ways to enter when the market is running like this without chasing. Breakouts will start to form. High consolidation patterns will develop and lagging sectors will start to perform once leading sectors start to take a breather. This rally looks to have legs.

Confusion Clearing Up

On Wednesday the NASDAQ followed through on a break back above its 200-day SMA and 2000 mark in a big way. This point represented a significant level of overhead supply so the break above will have an ongoing importance as we analyze the intermediate trend of the market and in particular, the tech sector, which has moved back to the front to take a leadership role. With this in mind, the NASDAQ has move up nearly 150 points since bottoming out near the 1900 level last month. It consolidated for a couple of weeks around 1975 but has been on a tear since. The market is getting top heavy near term and we would expect to see the NASDAQ come back and test its 200-day average or at least trade in a consolidation pattern letting it build a base from which to launch higher. We will be watching for this to occur over the next week or two. In the meantime, now that the trend is evident it will pay to trade with the trend. This does not mean that all stocks will trade in lock step with the indices. Now that the market has broken out we would expect that traders will be much more hesitant to sell into breakouts as they have been doing over the past 6 months. We would also expect to see some nice pattern developments as a big question mark has now been erased in the minds of many market participants. For the past few months the market has been very confusing. This has led to a lack of pattern development and choppy trading conditions. Things are just now starting to return to business as usual and conditions continue to improve as stocks once again find purpose.

Looking for Some Consolidation

The market is overbought but we have had follow through after follow. More profoundly, we have had a follow through day after the NASDAQ broke through its 200-day average. We consider this a significant technical breakthrough. Scale your charts back to August of 2004. The market was just as overbought by month’s end as it is now but the retracement was insignificant in comparison to the climb that followed. We see no technical reason that a similar pattern cannot play itself out here. That said, look for a pullback to ensue over the next week. We expect the pullback to set up for a good buying opportunity, but it would be foolhardy to look for significantly higher prices before the market has a chance to regroup a bit.

Bulls are Relentless

Yesterday we mentioned that the chip makers were up against resistance levels, using INTC’s $25.50 level to illustrate the case. Bulls charged right through however and INTC closed above this long-held level of overhead supply. Likewise, the NASDAQ charged through the psychologically important 2000 level, which just happens to also represent the technically important 200-day average. They say the bulls live above the 200-day average and the bears live below. Today the bulls popped their heads above to scout out the landscape.

Climbing a Wall of Worry

It is good to see the market climbing up off the floor and putting together some nice follow through after months and months of failing to do so. Low volume indicates that institutional money is still skeptical about this recovery however and is not yet participating in this move. This does not mean that this move is doomed to failure. Many times a recovery will start on low volume and as it progresses institutional money will come off the sidelines after pullbacks fail to develop. Keep in mind that institutional traders have a different set of goals than does the retail trader. While the retail trader is focused almost entirely on profits, institutional traders are focused on keeping up with the averages. Their greatest fear in fact is underperforming the averages and careers are built and lost based solely where their performance matches up against the S&P 500. If pullbacks fail to develop they will scramble to put their money to work fearing they are missing the boat. This is what we call “scaling the wall of worry.” We continue to look for choppy trading this week as contracts expire on Friday. The chip makers have been leading the way in this tech recovery, but now the sector is up against resistance and is likely to pull back and base a little before it attempts a breakout. INTC is a good stock to watch to determine how this sector will fair. It has resistance at $25.50 and has traded straight up for the past month. We would expect to see it retrace at least 1/3 of this move, regrouping before it makes a serious attempt at the $25.50 resistance level. This is analogous of the tech sector.

Choppy Week Ahead, But the Trend is Up

Options expire at the end of the week and if scan results after Friday’s trading can offer up a clue it would be that we are in for a choppy ride. The NASDAQ has indeed followed through and broken through the wall that represented its downtrend. It was even able to shake off an afternoon sell off as it closed strong on high volume. The blue chip indices did not fair so well, likely as a result of their commodities sectors, which were under heavy distribution again. Getting back to our weekend scans, a surprising number of short setups continue to show up and long set ups, even in the tech sector, are few and far between. Near term tech stocks are getting close to overbought, even though the indices are showing good momentum at this time. On the other hand, tech and the blue chips are still very much oversold from a long term point of view. What to make of this mixed picture then? We think that these mixed clues project choppy trading this week as blue chips try and find a floor and tech works off some of its immediate overbought condition. At this point, due to the long term oversold nature of the market, we believe the risk of surprise belongs to the upside and therefore risk on the short side is strong. A new uptrend is in its early stages of development but it is going to take some patience and careful positioning to profit from it.

Sector Rotation Underway

The story continues to repeat itself and we are getting tired of repeating it; we still lack follow through in this market. Does this mean that bullish hopes have been crushed by today’s setbacks? Maybe, but we don’t think so. Today saw massive amounts of sector rotation. Steels, oil and gold are trading in waterfall-type breakdown patterns while biotechs, the semiconductors, software, and other areas were holding up rather soundly in the face of a retreating market. Likewise, the trend line we provided for the QQQQ this morning, which was overcome by last week’s break, held the downfall. Thus, what we have today is a market which failed to follow through, but that did not break any support levels. It would be unfair to read much more into it than that.

Bulls Make Their Move

Recently we wrote that the market was at a critical point and that it almost had to do one of two things; either sell off as the trend reasserted itself, or break out on heavy volume. Today we witnessed the heavy volume breakout we had been waiting and hoping for. The bear trap likely captured its fair share of shorts today on the hard volume reversal. Trading conditions promise to vastly improve from this level as the market has finally revealed its hand. Follow through is important, but we would argue that this is a significant break in the downtrend and one that is likely to spur a strong recovery over coming months. This is still a rally that needs to build and create a base so don’t look for stocks to go straight up. Nevertheless this is we believe a significant technical event that offers the best promise we have seen in some time. Now then, let’s take this one day at a time. We have promise, now we desperately need follow through. All eyes will be on the bulls tomorrow.

It's a Struggle, But Downside Still Limited

Today looks like a good day to sit on our hands while we wait and see how this war at resistance plays out. Relative strength has been improving in the technical sector and the semiconductors have even recovered from a breakdown (breakdown failures usually reverse in the opposite direction). Our scans reveal some short set ups, mostly from the same group that has been showing up for several weeks now, but in general scans were neutral. Moreover, stocks that are projecting more downside over the next few days are deeply oversold on their weekly view severely raising the risk of stopping out on short covering rallies. Yes the market is at resistance now and yes we could experience more profit taking at this level. On a number of counts however the intermediate trend is now up and this means that the risk of surprise is to the upside. We saw a good example of this with NVTL yesterday. This 5-Month Downtrend is Winding Down to a Close As this 5 month downtrend winds down to an end we continue to suffer from a pattern of short, but quick moves followed by a period of slowly bleeding prices. This has done a number on our tight stop losses. As the market has struggled with this downtrend we have experienced quick periods of good profits where everything works followed by weeks of stops getting eaten up in the choppy market. If the pattern holds we are on the verge of a quick move – and this time a much stronger one – that should give us a nice bump up in our success rates. For those who are interested in a more detailed technical view of the market, this website, updated yesterday, explains a very bullish theory analyzing market structure and time turning points: http://marketclues.blogspot.com/ For those less technically inclined, the well tested and documented theory suggests that the market has been building a base and is about to make a strong move up that will last into the year 2006. As difficult as the market has been over the past 5 months, longer term views reveal strong support just below current levels and project a strong move higher beginning in coming weeks. It is important then to keep timeframes in perspective. What happens this week is not nearly as important as what develops over the next few weeks to next month. It is just a matter of time before this downtrend is behind us.

Time to Put Up or Shut Up

The market has gone about as far as it could possibly go if we are to continue to consider this latest upswing as a countertrend rally. Resistance levels were heavily tested on the NASDAQ yesterday and the S&P 500 has already broken through its downtrend line established from the beginning of January. What almost has to follow at this juncture is a hard reversal as the downtrend reasserts itself or a volume surge that pushes indices and stocks significantly higher. Overhead resistance on the S&P is still worrisome but strength in the tech sector is as promising as we have seen in quite some time. Momentum belongs to the bulls here and for the first time since last August we have a significant chance of enjoying a market breakout that could retest January’s highs. Proceed with care though since the balance is precarious here and could still tip either way.

Improving, but Still Precarious

Indices and many stocks are at resistance, volume was low today and all things being equal the market should sell off from here. That said, the dip buyers have been quietly scooping up shares each time the market pulls back and the market closed strong. It may be a day or two before we know if this is a significant development or just another doomed breakout attempt. Nevertheless, this is how the market climbs a wall of worry so stay tuned and stay alert. Somewhat significant was the relative strength in technology, which is finally showing some leadership, and in particular, the dogs of the market, telecom. Lucent and Nortel, for instance, made strong volume moves.

Rally Set to Correct

After evaluating scans over the weekend we find very mixed conditions as we move into the new week. Last week we mentioned that we might explore a hedge short side trade. It seems to make sense to do so considering such a wide range of bullish and bearish set ups that exist in the market after Friday’s trading. This strategy makes even more sense when we consider the fact that indices are trading very close to resistance levels and are projecting at least an initial failure (we wouldn’t be surprised if the failure at support was short lived as longer term momentum favors the bullish case here).

Downside Limited, Upside Promising

Now is not a time to lose focus. We are back at a critical juncture as the indices have moved up to resistance levels. The jobs report didn’t help to clarify the picture as we hoped that it would. Traders were most likely looking for a “Goldilocks” report that showed that the economy is not too hot, not too cold. Instead numbers came in surprisingly high taking wind out of the sails for those looking for a break in interest rate hikes over the next month or two. Even so stocks are behaving a bit more bullishly than they have in a couple of months. While we don’t want to bet on a breakout here we need to be careful to not bet too strongly against one either. We have always had better results shorting support breakdowns than we have shorting pullbacks to resistance, which are harder to time. One theme that stands out above the rest here is the fact that the market remains very long term oversold at current levels and a lot of money is on the sidelines. We may get a pullback off of resistance levels next week, but the downside appears to be much more limited than the potential (emphasis on “potential”) upside in coming weeks. As such, we need to be very picky and choosy and use tight stops if we do decide to short this resistance area.

Jobs Report to Set the Tone

Overhead resistance looms but so far the market has been able to brush off the General Motors and Ford bond downgrades and Intel’s cutbacks, and most importantly, a bounce in the price of crude oil. Tomorrow’s jobs report, issued before the market opens will likely ultimately set the course of either reversal off of resistance or catalyst for a push through.

This Rally is Gaining Momentum

In the after market report we focused on resistance levels that market indices are returning to. It is important to pay attention to these levels. However, a balance must be struck in our analysis at this juncture between overhead resistance and current momentum. Volume levels were not spectacular in yesterday’s market rally, but they were not so poor that we should automatically assume there was no institutional participation. Our scans today revealed that in fact there was a large degree of participation in yesterday’s rally and evidence that money is starting to come off the sidelines at these levels. Last week we outlined overhead resistance on both the NASDAQ and S&P 500. Now the indices are making a run at these resistance levels and they are building some good momentum along the way. As stocks run headlong into these walls of resistance we will soon discover whether the walls are made of paper or brick. In the meantime it makes sense to test the water here and jump in while momentum is gaining speed. If stocks get hung up at overhead resistance at least we will have a cushion of profit to withstand the rejection.

7 Small Words, But What an Impact

The FOMC statement was issued with little surprise yesterday. Hawkish statements on inflation remained, bulls hopes were crushed, and a large number of traders and funds put on short positions in the last hour of trading. Now the shocker! The statement was issued incomplete. One little sentence was omitted, but what a sentence to omit! “Longer-term inflation expectations remain well contained.” Understand that it positions were put on based on this statement that was in the original report: "Pressures on inflation have picked up in recent months and pricing power is more evident," which heavily implies that the Fed is no where near finished with the rate hikes. The omitted sentence heavily modifies this short-triggering sentence and since it was issued after the close a lot of shorts are likely to get caught in a bad position today. They really know how to keep us guessing. Scans turned up a neutral to negative picture today with a few, very few, areas of bullish interest. Stocks that have been trending lower and breaking down into 52-week lows are showing signs of continued deterioration and there just isn’t much evidence of accumulation taking place at the present levels to start predicting a turning point in this relentless downtrend. Bulls may open the market today on the Fed misstatement, but there is a reasonably good chance that bears will close it. The old stock trader’s adage “Sell in May, but don’t go away,” looks to ring true yet again.