Rally Needs a Rest

While we find ourselves nearing the end of earnings season and right in the middle of the end of the month buying window, trading conditions are very poor. Stocks and indices alike are extended and need to pull back and regroup. This month’s buying window may merely prop up indices rather than push them higher. Stocks are still breaking out, but with little conviction. Volume levels are drying up and the put/call ratio shows that bulls are overly eager, which means they are likely to feel some pain near term.

Hesitation, but Odds Favor Longs

The market continues to be plagued by indecision as a result of a intermediate overbought condition and a plethora of earnings releases. Scans turned up very thin this morning with a few short set ups. We are very hesitant to jump to the short side for several reasons. Today starts the 5-day window that marks the end of the month buying spree where funds have new dollars coming in from retirement account deductions. Likewise, the trend is still up and choosing a market top is a recipe for disaster. Finally, if the market fails here, the countertrend rally will provide a much better risk/reward ratio than gambling here. We are betting that short positions put on here are going to provide fuel for the fire as end of the month buying kicks in. Short covering should propel indices and stocks higher over the next few days.

Pulling Back, but Weekly Breakout in Tact

Relying on the weekly charts we have to make the assumption that weakness experienced at the current level is nothing more than minor profit taking and consolidation. Surely shorts are being sucked in at these levels, but it is precisely this type of reaction that can and does propel a market higher. Shorts try and pick a top (a very difficult endeavor indeed) and when bulls retake their ground shorts cover their positions at a loss and the market propels higher. Again, the weekly breakouts we highlighted last week have not been compromised and technical indicators do not show serious distribution taking place yet so for the time being the risk/reward ratio favors the long side.

Strength in the Midst of Earnings

Scans turned up a strong underlying current from what would appear a lackluster close on Friday. A great number of stocks are setting up in nice tradable patterns. Unfortunately, we are forced to set the majority of them aside as we find ourselves caught dead center in the middle of earnings season.

S&P Breakout has Significant Ramifications

If there is one constant in the market it is that the market constantly changes. Summer is supposed to lull traders to sleep as the market drifts on low volume. This year is different. We moved from a very poor year last year where volatility levels hit all time lows and trading accounts suffered drawdowns when breakouts and breakdowns failed to follow through. Now here we are in the middle of July and the S&P just broke out into a new 4-year high. Significant about this breakout is the fact that it doesn’t appear to be slowing down any time soon. The price action over the last week has pushed the index through a long term triple top pattern projecting significant growth over coming months. The NASDAQ has yet to test its overhead resistance, but the S&P is free and clear for some time to come. Under such conditions pullbacks become buying opportunities and breakouts tend to succeed at a significantly higher rate. Technically we can find no reason why this breakout could be false. It would take a fundamental change in the current market environment to slow down this momentum.

Earnings Season Increases Risk

A slew of earnings are coming out this week and next. With the market trading near 4-year highs and with the lack of a significant pullback for several weeks now, the mix is a volatile one. The technicals say that prices will continue higher and that the bears are the ones taking on the greatest amount of risk. However, there is a serious whipsaw risk as potential for hard intraday reversals grow due to the factors mentioned here. We are reminded of the old television series Hill Street Blues when the sergeant implored his troops at the beginning of each day “Let’s be careful out there!”

Path of Least Resistance is Up

All three major indices closed out the week at breakout levels. Regardless of whether or not the intraday or daily charts are showing signs of being overbought, they are far from it on a weekly basis. Understand that in technical analysis the longer time frame is most often given precedence over lesser time frames. Overbought conditions can remain overbought for long periods of time in a trending market. They can also work themselves off by sideways consolidation. Since we are looking at weekly breakouts here overbought oscillators must be interpreted as complimentary to the trend and not as an indication that reversal is imminent (as would be the case in a ranging market).

Important Day Today

Scans revealed strength in some areas of the semiconductor sector and in airlines. Momentum from yesterday appears to have some legs, but the proof is in the pudding and today comes the real test. If we get a strong market close today it will mean that we have a weekly technical breakout across many sectors and should project much higher prices to come. If the market stalls out here, it may mean some tough days ahead over the next week or two. Commentators are getting fairly bearish at this point and are suspicious of this latest move. We admittedly have been hesitant this week as well. However, taking a look at the weekly index charts a strong technical pattern is setting itself up on all three major indices. The S&P has broken out of a triangle, the Dow is pulling up strongly off of support, and the NASDAQ is showing nice follow through from the neckline break on the cup and handle, or head and shoulders pattern. Indicators on all three indices are strong here as well. So, while the daily charts are overbought, the weekly charts are far from it. Overbought conditions can persist during a strong trend and we may very well be at the beginning of a strong trend. Again, today is important as it will determine the weekly close levels.

Weakness After Yesterday's Session

Breadth was much poorer in yesterday’s session. Very few worthwhile stocks showed up in our scans. When this occurs it raises a red flag for us. We haven’t found such an occurrence to be an accurate long term indicator but it almost always spells out that a weak day or two of trading is upon us. For now we will wait it out and see if this turns into something uglier or if it will just lead to a few days of consolidation.

Rally Set to Continue

There appears to be a great deal of breadth behind this recent rally. The NASDAQ 100, represented below by the QQQQ, is testing the neckline of an inverted head and shoulders pattern (or a cup and handle, depending on your preference here) and the S&P, represented by the SPY, has broken above resistance and has formed a base.

QQQQ and SPY

Strong Friday Trading Gives Hope to Bulls

Friday saw some nice follow through. Volume could have been better, but it was decently strong. Scans didn't return a spectacular number of new breakouts or strong chart patterns. On the other hand, scans did turn up a lot of stocks that appear to be continuing from where they left off when the most recent rally stalled a few weeks ago. Likewise, stocks that were trading near 52-week lows for the most part started to move above their 20-day averages in what is turning out to be a refusal to go lower. We don't know if this recent bullish progress has the gas to make a serious run, but we do know that we donät have the luxury of second guessing it. If it turns into a real really, then this is the beginning and saying could have, should have, would have after the fact is no way to make money in the market.

It's All About Energy Until it's Not

The market showed some good strength yesterday and could be gearing up for a run higher. However, the strength is not showing up in individual shares just yet. Oil on the other hand still has some power behind it and energy-related stocks are breaking out and running right now.

Energy Starting to Weigh

Energy prices continue to take their toll on the broader market and right now it continues to be the only sector that is working. We will take that as a hint and focus our attention there until the situation changes.

High Oil Fails to Stop Buyers

Oil, the one true trending market right now, ticked higher but the stock market wasn’t daunted as buyers stepped up to the plate at support and pushed indices back to minor resistance areas. There is not much to get excited about until resistance is overcome, but at least we have support just below and evidence that at least some buyers are willing to defend it. We believe there is potential for the major market to rally out of this trading range and run back up for a test of recent highs.

Oil Strong

Tech closed near daily lows on Friday testing established support levels. It will be important to see which hats traders come back wearing after a weekend in the sun; sellers or buyers caps. Oil, meanwhile, continues to move higher as do oil related stocks. Note the XOI (AMEX Oil Index) chart, which reveals a strong bounce off throwback support on Friday. It also is sporting a strong histogram buy signal and improving accumulation figures.