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.