Never Short a Dull Market

Yesterday we mentioned a line in the sand where bulls had to make their stand with the QQQQ. Window dressers didn't show up once again and the QQQQ wasn't able to hold support. We don't wish to be ultra stubborn with our bullish stand here but even though the situation looks dire for the bulls there is something that needs to be considered. Going back to last month recall that window dressers did show up until the first day of December, or the third day into the traditional window. On December 1 the market gapped up and continued to run for several days after discouraged traders denied end of the month buying washed out November 29th and 30th. Consider that the market is very oversold here, that there have been no real distribution days aside from December 8, and the fact that end of the month buyers could potentially be waiting for market sentiment to turn a bit more bearish before they step in. Now if a series of real short set ups start showing up in our scans we will rethink our theory here but right now we think there is still potential for a sharp reversal. We hope that subscribers can see why we have hesitated to put money to work in the market as we wait for the market to make its move. The best immediate term indicator we have at our disposal is the health of our daily scans. All week scans have been telling us that buyers are just not stepping in yet. On the other side of the coin, they have not indicated that distribution has been taking place either. A few smart rules to live by: Don't short a boring market, don't short an oversold market if selling is occurring on light volume, and finally, don't short into the end of the month.

Bulls Have the Setup, Will They Take Advantage?

If you drill down to the 40-day, 2-hour view on the QQQQ an interesting development is revealed. The price pulled back to the 200-period average and bounced early around the 19th/20th of the month. This week the price has once again pulled back to this moving average and yesterday the price bounced once again, this time with strong bullish divergences on most major indicators. There is a line in the sand drawn for the bulls here. The QQQQ must not go below $40.77 or the index will most likely drag back down to $39.50. That said, the set up for the bulls is clear and with end of the month window dressing upon us, odds vastly favor a strong move higher starting today. Such a move higher will produce reliable buy set ups.

Looking for Positive Bias to Continue

Last week ended with a slightly positive bias and with indices still oversold. Buyers need to step up here however or the correction that started in early December could persist into January.

Signals are Mixed

The weak bounce yesterday was uninspiring and leaves much to be desired. It may be that that Santa rally turned out to be just a self fulfilling prophecy and not one that was led by legitimate end of the year factors such as fund mark ups. Making a bearish case it may be that traders sold early strength and we may find that the intermediate downtrend started this week will remain in effect until the QQQQ reaches its lower channel support as outlined in Tuesday's report. The bullish case, which we still believe has some merit, is that the market pulled back to intraday support with bullish divergences showing on various indicators and the late afternoon pullback is just another attempt to shake out weak longs before the real rally begins. Today should be interesting. (Hedging? Yes we are hedging. The signals are mixed here.)

Sellers Exhausted

The QQQQ stopped just above its 50-day average and left a doji yesterday. A doji represents a day of indecision. Considering that there is still a favorable seasonal bias even if the rally that everyone expected didn't arrive (perhaps in fact because everyone expected it) and considering the fact that indices have moved from overbought to very oversold we have to entertain the idea that the market has delivered a near term bottom. Yesterday we indicated that follow through from Monday's breakdown would have to ensue before any reliable short set ups would emerge. Follow through lower did not arrive and though buying opportunities are still thin we should see an upward bias into the end of the year.

Santa Stays Away

Santa may not arrive on Wall Street after all this year. Several important indices in the tech sector broke decisively below lower support levels. The S&P and Dow threaten to follow. Follow through is always important, but we may find that the market is offering some short swing trades this week. Keep in mind that a pull back here does not destroy the longer term outlook for a continuation of the strong bullish move begun in October. Taking a look at the QQQQ you will notice that after the weekly breakout in early November, the price has now been turned back by upper channel resistance. There are two points where the price can now find support, depending on how determined sellers are. Minor support can be found at the pivot point towards the center of the channel, roughly just below yesterday's close. More likely however the price will track back to the $40 area where the major trend is. The latter is a more likely scenario and one which should produce some intermediate shorting plays.

It's a rare thing to not experience the Santa rally, but as everyone should know by now, the market does experience anomalies and it is better to expect the unexpected than to rigidly hold onto your original bias.

Dazed and Confused

Yesterday traders were frustrated as numerous breakouts from the day before failed and the tech sectors, which had been leading since October underperformed. Meanwhile, small caps represented by the Russell 2000 showed some life as the index touched a new high before pulling back slightly and the S&P 500 broke to a new high. It was a very mixed and frustrating day for a lot of people. Adding to the confusion is the fact that our scans over the past couple of days have been turning up virtually a handful of poor set ups. Today's scans were of even poorer quality and turned up nothing we would trust. Frankly we are hesitant to make any conclusions about what message these mixed signals are telling us. The last two weeks in the year are traditionally strong as funds try to gun their performance measures and expectations for a Santa rally causes people to come off the sidelines to participate creating a self-fulfilling prophecy. This year could of course be different as the market never guarantees anything, but we sure wouldn't bet against a year end run. Likewise, we never wish to force a trade when there are no clear advantages. Right now there are no clear advantages and we have little choice but to wait this out. It is very likely that other market participants are just as confused as we are right now and this confusion is causing the mixed readings we are seeing.

Watching for a Small Cap Breakout

The small caps didn't participate in yesterdays rally but there is a good chance this is about to change. The Russell 2000 is flirting with a break out into new 52-week highs so we may start to see money flowing into the quicker moving small caps as we head into the second half of the week. It is likely that the Fed release yesterday will be hashed over for a few days as analysts try and determine if they are done raising rates for now. The market so far has reacted quite positively to the release and there is at least a good chance that the Fed will take a break here to give the economy time to digest the latest round of rate hikes. Overall there doesn't seem to be anything in the report that threatens to derail this latest bull run so we should start to see the market climbing higher once again now that a base has been building over the past couple of weeks.

All Eyes on Fed Today

Today's Fed meeting is likely to set the tone for the rest of the year. All eyes will be scanning the Fed release for language indicating that rate hikes are near completion. Specifically the market has been expecting the word "measured" to be deleted from the report. This has been the word used by the Fed over past months that has been interpreted as hawkish on rate hikes by most analysts. As we approach the meeting today charts are set up for a run into the end of the year. The NASDAQ and S&P 500 are both trading with strong bull flags and are showing good divergences all around. A break up from these flags will be a buy signal and those who have remained doggedly short are essentially going to have no choice but to flip to the long side propelling prices even higher. The Fed report may or may not impact this set up. We just have to wait and see what they put out and how the market interprets it. Gold is most likely going to feel the most impact from the Fed today. If hawkish language is removed then we should see gold shares continue their rally. If not, then the sector weakness we have witnessed over the past couple of days will likely turn into something worse. Today is a really good day to stay sidelined waiting for the market to react to the Fed. If the broad market turns higher here we will have many new advantages so it makes sense to wait a day rather than try and force something to happen in front of the meeting.

Oversold Market Likely to Continue Assent

The NASDAQ 100 has pulled back to its 20-day average as money flow and other indicators continue to positively diverge. This indicates that accumulation has been taking place propping up the price. Meanwhile the SMH held where it had to and should move higher off of its breakout point. The market, which has been overbought recently, has now moved into oversold territory and positive price action and positive technicals favor a break higher as we move into the last couple weeks of 2005.

Bull Flag Fails, But Lower Support Holds So Far

The bull flag failure on the SMH yesterday is concerning. The price closed back at weekly break out support so it is very important that the SMH hold here if the health of the market's uptrend is to remain in tact. We are still reasonably confident that support will hold as underlying stocks look much better than the tech indices at this point. In fact gainers outnumbered losers yesterday even though indices traded in negative territory. Weakness in INTC most likely caused some to misread the direction of the broader market causing some fear based selling. Even though we are still bullish here our bullish position can change quickly if the market follows through and closes out the week on a negative note. It is important to remain objective and not let hopes get in the way of realities. As of the time of this writing, there does not appear to be anything to worry about.

Bulls Wait to Spring

The broader market continues to consolidate recent gains and recent red bar/green bar up and down days are likely to continue for a few more days at least. One of the better leading indicators for the health of the economy is the semiconductor sector. We believe that this sector is in the early stages of forming a bullish flag pattern. A bull flag is formed after a breakout and serves to work off oversold technical conditions and to create a higher base of support. The implications are in fact bullish due to the fact that profit takers are unable to effect a significant price drop as buyers continue to accumulate shares at the lower end of the range.

To support the argument that the SMH (Semiconductor Holders - above) is undergoing consolidation and not something more you need to pull back to the weekly chart.

From this view it is clearly seen that the price has broken above significant resistance and is merely taking a rest before continuing higher. The green line represents its 200-week average, territory the semiconductors have not enjoyed since the tech bear market began in the year 2000. Not only is a recapture of this territory bullish, but it represents an objective way to measure the beginning of a new bull market in the sector. We believe that we are very close to the point of recognition when serious bears that have been short this year finally capitulate and move to the bullish camp. We believe that a break up from this bull flag could be the catalyst that will convince them to do so. When this happens the market is going to spring forward to dramatic new heights.

Gold and Silver Ramping Higher

The last two days we just didn't have a really good feeling about the near term potential for the market. Indices are overbought and nothing really reliable was showing up in our scans. As such we stayed sidelined. Yesterday the broader market made a move higher but on low volume. Late in the day the move was predictably faded and we have indices such as the S&P 500 and NASDAQ 100 leaving selling tails at resistance. Gold and silver on the other hand made a strong move higher and this sector may be the area to play while waiting for indices to correct. The two gaps on the QQQQ mentioned yesterday are ominous at this point and we are very likely to see them filled over the next week or two. Longer term a pull back here is quite bullish. If the market would keep going here it would more than likely be an unsustainable move, which would invite sellers. A rest and pull back will refresh and stabilize the trend.

Market Continues its Rest

We are experiencing a pullback in a very strong uptrend. Some traders with a very agile approach will likely try to short the pullback here but we don't recommend it. Surprises in strong up trends usually occur in favor of the trend. This week is likely to be a volatile one and there is a good chance that the open gaps on the QQQQ from November 17 and December 1 will be filled as overbought conditions are worked off here. This will be a good opportunity for the market to shake loose some bullish sentiment allowing the indices some power to push higher once again. The breakout in the gold and silver mining companies is likely to resume its trend soon but at this time there are no favorable entry points. There are a few set ups in the broader market, but risk of failure is fairly high and it's still early in the week. We prefer to stay sidelined another day managing our open positions and waiting for more favorable entries. Keep in mind that waiting for the right time to enter a position as well.

Semiconductors Break Out, Market Needs Rest

Indices traded higher on Friday but an overextended condition still exists despite the back and filling that took place early last week. There is no reason that overbought can't remain so for long periods of time, however, a pullback from these levels should not be contrived as bearish. The QQQQ is trading at the top of its trend channel here and risk of opening new long positions is fairly high as we begin the week. The most important development to focus on from last week's trading is the fact that the semiconductors finally broke above long term resistance levels. The SMH powered over $37, which had been holding it back for months. This breakout represents a move back over its 200-week average, territory it hasn't traded in since the tech decline started in 2000. Since the semiconductor sector is one of the best leading measures of the economy this breakout suggests that 2006 will be a very good year for US markets. Even so, it is altogether possible, and in fact even desirable that the SMH and underlying semiconductor stocks, pull back and back and fill a bit here before moving higher. A base of support has not yet been established so if this new trend is to remain healthy it should take a rest here. Scans weren't particularly strong today, but this is to be expected since the major indices are up against resistance levels. Now that the market is in a strong up trend though we should start to see some second-tier type stocks beginning to make moves as profits taken are redistributed in some speculative positions. Now is the time to be careful, but not necessarily sit on the sidelines.

Panic Buying Underway

The market powered higher with gusto yesterday as buyers waiting on the sidelines piled on top of each other as they scrambled to get in. Fund managers who have been sidelined do not want to answer to fund holders for missing the year end rally and panic buying is now under way. A hard reversal here is unlikely as dips are likely to get snapped up quickly.

Underlying Strength is Revealed if You Know Where to Look

The broader market continued to pull slightly lower yesterday and volume levels remain high on all major indices. Most people have the idea that high volume at the upper end of the trend represents distribution and that it is a bad sign that the market is ready to make a turn for the worse. In many cases this is true, but it's not always that simple. There are a couple of reasons why we believe the high volume levels over the past three days represent accumulation and not distribution. First, advanced decline ratios have remained positive as more stocks continue to advance than decline. The second reason is more subjective and much harder to quantify. We scan thousands of stocks each day and individually look through several hundred charts that result. On Tuesday you might recall we noted that we didn't find much to act on but that there was little sign that bears were getting a foothold either. Yesterday scans were slightly more positive as small caps and stocks from a few leading sectors started to once again show strength. Today's scans reveal that that positive trend is once again gaining traction as more and more breakouts are following through and more and more stocks are once again moving higher on heavy volume. In fact, twice as many stocks showed up in our volume scan today compared to yesterday. Of those stocks roughly 90% were making moves higher. This is not what market tops look like. Instead, this is what occurs right before a new leg higher gets underway.