Bears Get Squeezed; Today Very Important

Shorts got caught leaning too hard yesterday in anticipation of a breakdown from the bear flag set up we have been analyzing this week. Oftentimes when a signal or set up is so obvious that everyone sees it, it is better to take a contrarian approach. The reason is that if too many traders are leaning one way and the market has not yet moved in their direction, there is nothing else the market can do but reverse. Bears had their capital committed for a breakdown, then end of the month buying kicked in as retirement money started flowing into the market. Subsequently short stops triggered, shorts started to panic and run for the exits and prices cranked higher. The $100 question is, was yesterday a one day event or was it the start of a greater upward thrust? Since we know that buying generally kicks in for a few days this time of the month, we hesitate to get too excited about yesterday’s move. HOWEVER. If you pan out to the weekly charts on both the NASDAQ and S&P 500 an interesting development is brewing. Yesterday’s trading corrected the broken downtrends on both charts. IF, and it’s still a big if, prices can close at least as high today as they did yesterday, and preferably higher, we will have weekly buy signals on both major indices. Additionally [now we are moving from analytical mode to purely speculation mode], if we get a weekly buy signal that turns into a breakout of both major indices, we could see a real bull market develop and see some real fireworks as we move into the end of this trading year. From the beginning of 2004 the markets have been moving pretty much sideways. We experienced decreasing volatility and have made no real progress during this time frame. Suffice it to say, we have had to work excruciatingly hard to pull money out of this market. Money that was easy in 2003 has not been for the last 18 months. That said, the indices are now trading only slightly below overhead resistance levels that have kept this market fenced in during this time. We want to highlight this: If the market holds here, right here this week, it would be reasonable to expect a run at overhead resistance. The QQQQ is trading at $39.20 and only needs to close over $40.00 to break out. The SPY is trading at $122.66, and only needs to close above $125.00 to break out. Prices have been bouncing off these two levels for almost two years. If the weekly up trends hold here these two levels could face their first TRUE test in more than 18 months. Will it happen? Will we get a test of overhead resistance? And if we do, will we see a breakout? These are questions that no one knows but the implications of such a breakout would be a huge boost to our own bottom lines.

Bulls Look Very Tired

The bear flag development mentioned yesterday has been playing out with a great deal of stocks. This indicates the underlying trend is down and ready to make another leg down despite the end of the month buying window we are now in. Window dressing may or may not hold off the inevitable, but considering the weak behavior on the long side, including broken trends, bear flags that are developing in numerous sectors, and poor volume on up days, the path of least resistance points down.

End of Month Buying May Just Delay the Inevitable

As you can see from the QQQQ (NASDAQ 100) chart below the tech sector is in a precarious position. The uptrend has broken and has failed its first test. Its last line of defense is $38.25. If that level breaks down a downtrend will be firmly established and it would be well advised to trade the short side until the trend corrects itself. The semiconductors, which led this tech rally to begin with, have already broken through their last line of defense so probabilities favor a breakdown of the broader tech sector. Even so, today marks the first day in the end of the month buying window that nearly always takes place due to an influx of retirement account money into the market. While new money is being deployed, a great deal of shuffling takes place as funds redistribute their accounts. This should give the market some temporary support. We need to use this opportunity to put together a list of good short set ups. Ideally it would be great to see the broken trend line on the QQQQ (above) be retested near the $39.00 level. If $38.25 breaks first however, all bets are off and shorts should be established at the breakdown point. Interestingly enough, there were a number of bull flag failures in the gold sector yesterday. The sector still has a chance to hold support, but this development is the first strike against a bullish case. Bottom Line: We are hoping for a good wash out slide in the market during the month of October. The market has been moving up weakly on poor volume and even poorer breadth. Trade set ups have been failing at a much greater rate than they were during a similar rally last fall. This is a market that needs to shake loose a few cobwebs and a good retest of July’s lows would be a nice way to establish some volatility and increase buying interest once again. The short side has not yet produced a large number of opportunities. However, if the last line of defense on the NASDAQ is broken through we would be willing to bet that downside breadth will be plentiful. This will provide us with reliable set ups on both the downtrend and also good set ups on the following bounce back up. In short, much needed volatility could be reestablished under such a scenario.

Bearish Fears Project a Bounce Sometime This Week

The put/call ratio has once again turned overly bearish as traders reacted to the sell off at resistance yesterday. Technically the indices are set up for a good short, but considering other factors such as unsustainable levels of bearishness and the approaching end of the month buying window, there is a potential for a short covering rally to ensue this week. We could very well see prices dip back down to their August lows but it is likely we will find support there. Gold is either basing for a move higher or is under distribution and ready to reverse course at long time resistance one more time. Technically it appears that the miner stocks are basing for a move higher, but until they make their move out of their current intraday ranges we won’t know for sure.

Oil Falling Over the Weekend, But is it Enough?

We highly recommend remaining in a cash position at least through Monday as we wait to see how the market reacts after Rita and how it continues to price in events from Katrina. Oil futures are taking a hit this weekend, but anything could happen on Monday. Major trendline damage has occured on both the S&P and Nasdaq indices and we are not yet convinced that falling oil prices will be enough to repair the damage incurred. When we just don't know what will transpire it is just better to wait for a clear opening before throwing money back into the market.

A slight weakening in Hurricane Rita was enough to deliver a pretty good bounce in the late afternoon yesterday. We had a quick spike in the morning when breadth was almost 3 to 1 negative, but that slowly faded until news of the downgrade in Hurricane Rita hit. Crude oil pulled back as traders faded the breakout to new highs and stocks bounced as the winds slowed from 170 mph to a slight breeze of just 150 mph or so. This market is all about trying to guess how well we have priced in the inevitable damage. Anyone who thinks the market is an accurate discounting mechanism is probably teaching college finance somewhere. The rest of us know that this market is clueless about the fallout of Hurricane Rita, and it is acting like it, by bouncing around randomly. Today we should see more of the same. This is just not a market we want to get in front of. We hope negativity returns today so that a serious relief rally can ensue next week. If optimists bet on the relief rally today however, it could set us up for disappointment next week. So in the bizzaro world of trading, negative today is positive next week, positive today is negative next week. This is one confused market and what works under "normal" conditions is just not working right now.

Defensive Trading in Front of Rita Wreaks Havoc on Trades

Selling in front of Rita continued yesterday putting market players in a defensive posture. As we stated last week, this environment demands flexibility. Rita threatens to be as destructive as Katrina, and as such could strike a hard blow to the US economy and cause energy prices to spike even higher. Gold prices are extended, but after closer examination of the sector, we question whether the miners are still shortable here. We will need to see prices start to roll over before we would get serious about shorting the sector. Meanwhile energy prices are ramping up once again and big money is making bets on higher prices as many issues are seeing large volume breakouts in front of Rita. Prices may or may not reverse next week as profit taking hits the news (they certainly didn’t in the wake of Katrina), but right now the sector is very strong.

Bulls Have Their Backs to the Wall

The bulls have one last shot to snatch victory out of the jaws of defeat. It is a rarity when the market follows through the day after the Fed meeting, so if they can close the NASDAQ back above 2150 bulls will remain in the game. As it stands now, bears have the upper hand as seen by yesterday’s trend break. The S&P on the other hand has not yet broken. The question here is will tech pull down the market or will the broader market lift tech? It is highly unlikely that the two will diverge for long. If the NASDAQ follows through lower today or fails to recover the trend, the short side of the market will then provide the most probable opportunities.

Gold Shares Projecting a Top

The story for the day yesterday was gold. After a parabolic move over the past couple of weeks gold shares reversed hard and on volume. The move up was more than likely built on speculation and not on a true character change in market supply and demand for the precious metal. Technically gold is at the top of its range and if it remains true to its character, it is ready to oscillate back down to the bottom of its range once again. If the Fed doesn’t raise rates today this may change, but from the way gold shares traded yesterday, sentiment clearly favors another rate hike.

Trend Depends on Fed

Trends were tested hard last week, but at least initially they are holding here. We are at an important line in the sand for the semiconductor sector, which had been an important leader in the rally started last summer.

The S&P, like the NASDAQ, held firmly this week and both indices left good high volume reversal signals at their respective trends so we expect to see bulls in charge as we begin the week.

Important to note: The market is screaming bounce here. It’s oversold on a trend line pullback in a larger uptrend. The potential curve ball could come from Greenspan and the Fed. If they raise interest rates this week, and despite what talking heads assume there is a good possibility, it could be seen as a bearish development. We may be forced to cash in our bullish chips should the market react poorly to the Fed meeting Tuesday. Given the various pressures on the market at this juncture flexibility is an absolute must.

Triple Witching Day

Yesterday's market was pretty much flat after Wednesday's sell off. With triple witching day today we have to consider the probability that prices are being “parked” into their maximum pain values where option sellers maximize their profits. The market has a very bearish feel to it here, but this “feeling” is at least partially skewed by today's contracts expiration. The QQQQ is trading in a bear flag on its daily charts so it may drop lower today. Trend support is just below $39 and maximum pain is $39. We have to wonder that this trend might be in jeopardy next week. We didn’t trust the throwback on gold late August. It looked like a breakout failure like so many stocks and sectors over the past year so we missed the initial strong leg up in this newly developing bull trend. Gold miners are extended at this point but a pullback here should provide for a nice buying opportunity. If it starts to pull back here, we would like to see the XAU retrace to around 101-102 where we believe it will have support.

Market Slides Toward Maximum Pain

Yesterday stocks were stung as the nuetral market trend gave way to pressure from options sellers using higher energy prices to dip prices toward maximum pain levels for this Friday's options expiration. Maximum Pain is the price point where the maximum amount of dollars will be lost by option speculators. When the market trend is near neutral option short sellers can control stock prices and "park their cars" on strike prices which extract the most money from the speculators. For the QQQQ (NASDAQ-100 Index), the Max Pain price this month is 39. For the OEX, it's 570. QQQQ closed Wednesday at 39.19 and OEX at 567.41. We expect that yesterday's harsh sell off, which showed little mercy to UBET, will ease up and we may even get a small bounce. The market is most likely to trade relatively flat moving into the end of the week. Longer term the trend is still up so next week we may see some good upside as option sellers release thier grip.

Monitoring the Semis for Continued Upside

This rally started with the semiconductor sector leading the way. Yesterday the S&P 500 experienced a distribution day and the NASDAQ indicated it needs to pull back a bit before it can tackle overhead resistance. However the semiconductors, the lead dogs for this rally, are trading right at their breakout battle grounds. The SMH is right at its long term trend and price is testing breakout levels. If it can hold up through the week and close above $37.50 by Friday we should start to see some real breakthroughs in the tech sector.

Market May Trade Flat for a Couple Days

Scans were thin today, but that’s to be expected now that the market has some resistance to deal with along with triple witching options day on Friday to contend with. We will most certainly get some bumps in the road along the way, but the technical condition is looking fairly bright here. Here’s some interesting analyst comments from MarketWatch: Money management and research firm Bridgewater Associates thinks stocks "look cheap," not just in the U.S. but globally. The firm said its research suggests earnings yields are currently about 2% higher than bond yields. In addition, the stock markets of developed countries are on a whole 20% below their pre-bubble peaks, while unadjusted earnings are 35% higher and bond yields are 2% lower. "The current pricing for global stocks is as pessimistic as it has been in a generation," Bridgewater said in a recent note to clients. "While global equity prices have risen in recent years, they have paled in comparison to the increase in earnings and have not reflected the drop in bond yields." That helps explain why the stock market seems to get a boost whenever the 10-year Treasury yield approaches 4% -- stocks are just too cheap to ignore. The resulting asset shift into stocks has led to short-term run-ups in bond yields, like the rise seen over the last week, but as we've seen over time, these gains have proved relatively short lived.And the following declines are starting to go lower and lower, which should, all things being equal, make stocks look cheaper and cheaper.

Climbing a Wall of Worry

The market is scaling a wall of worry here in face of higher oil and talk of a slowing economy. The S&P broke out to close at its highest weekly high in 4 years and as we start out triple witching week the NASDAQ is threatening a breakout as well. The secret here is to not over think this situation too much. The trend is up, and while it may be a cheesy platitude, the trend is indeed our friend. Last month was a miserable month where prices chopped around creating very few trade opportunities. In hindsight we can see now how that action, which was poor for trading, was creating a base of support from which stocks could launch an attack on 4-year breakout levels. We are not there yet, but last week ended on a positive note. Let’s see if this week follows through.

Up Against Key Resistance

The semiconductor sector is testing its 52-week highs but breadth in the sector is thin so today is going to be a key day to watch. Meanwhile the NASDAQ and S&P look ready to pull back, so unless volume and price move higher here the rise started last week could be on its final legs. Again, today is key.

Market Inches Higher

Volume remained strong yesterday and price action was fairly positive. It is reasonable to assume that since indices recovered their 50-day averages so convincingly over the past few days of trading that we will at a minimum see a retest of recent highs. Likewise, double tops are fairly rare, so we could see a fairly decent rally take shape over the month of September. Elliot wave patterns put both the S&P and NASDAQ at the crux of a 5th wave development. At this point we are taking a “wait and see” approach and will be watching carefully for any warning signs that the trend is faltering.

Negativity Withers as Bulls Rally

The ability of the market to shrug off last week’s events and push higher yesterday seems to reveal an underlying resilience that was unexpected by many including us. The potential end to rate hikes may be the catalyst sending prices higher here. The QQQQ and SPY rallied on strong volume. From here it looks like at the very least recent market highs will be retested. It’s nice to put a dreary August in our rear view mirror and see some volatility return. It is hard to say how much gas this rally has behind it, but that is a question for another time. Right now we need to get in while the getting is good. Breadth was strong yesterday and scans revealed a strong number of new 52-week highs and stocks testing breakout levels and/or breaking out. Volume was strong across the board. This is not a market that is playing defense.

September Starts Neutral to Negative

The hurricane events over the past week have really thrown the commodities markets into frenzy. Already extended oil prices spiked even higher as damage assessments rolled in. It is difficult to complain too much about the damage this did to our oil shorts when considering the fact that so many are now without homes or worse as they still continue to deal with the aftermath. The market is still trying to work out what the long term economic impacts on the US economy will be and bets on and end to interest rate hikes are now being considered by the market. Equities are in a tough spot here. The NASDAQ, as pictured below, moved back up to broken support in a throwback pattern. Technically speaking, this is a short set up. Scans however turned up neutral over the weekend and we really need to see the index break lower before we will get any decent short setups here. So, while odds favor at least the technical sector rolling over here, it is best to be patient and wait for follow through. It will be interesting to see what note this week will begin on.