Significant Strength in Gold and Oil

An inverted yeild curve on long term bond rates signals a recession down the road. As we mentioned the other day, it is likely that the Fed is engineering just such a recession in order to put a cap on rising commodities prices as well as let some air out of the US real estate bubble. A recession is likely a year or so off however and this week the yeild curve on bond rates moved up to test the downtrend line. A break above this line will give a boost to the stock market. A rejection will likewise cause the market to sell off somewhat significantly here. As we move into the end of the month of March the market is either betting on a yeild breakout or the monthly mark ups are masking the market's true intent. Likely we are seeing a bit of both play out here meaning that the going in the broader market could remain rocky over the next week or two. Meanwhile, significant opportunities are cropping up in the commodities markets as well as in some areas of tech.

Market Reacts to Fed

The Fed implied a continued hawkish position on inflation and in particular inflation in the energy sector. In order to do this they will have to seriously slow down the US and even world economies. The message the market reacted to yesterday was that the Fed is engineering a recession. This led to a second high volume distribution day in as many weeks. The long term trends established from last fall are still in tact and given that we are moving into the end of the month buying window we would expect that today will see a reversal from yesterday's downturn. This keeps us with our pattern of one day up, one day down trading that has frustrated so many over the past weeks. Major market trends have been sustaining some technical damage of late though and we believe it is just a matter of time before we see a more serious correction. Energy stocks are once again seeing signs of life and could be mounting another leg higher soon. It will be interesting to see how gold stocks respond to a stronger dollar; if the trend in the dollar continues the gold sector could be a short here. Many small cap stocks look like they could make another run. It is probable that some short term trades can be had on the long side with small caps, but profit protection is an absolute must in this market environment. The good news is we are starting to see an improvement in volatility levels, which should lead to more promising set ups on both the long and short sides of the fence.

Chips Continue to Experience Weakness

The semiconductor stocks, which had been showing nice support off their long term trend as late as last week, showed more weakness yesterday. The SMH reversed and rolled over after attempting to regain its 200-day average. If a rotation into tech is going to have any chance of working out, chips are going to have to start behaving a lot better here. At this time the market just feels very weak and breadth figures are very poor on market rallies and good on market sell offs. This indicates continued distribution and there is a good chance that support levels established by the multi month uptrends started last October are in jeopardy of failure. Don't expect the Fed to provide much help this week. They are very unlikely to provide the market relief by projecting when rate hikes will finally end. In fact, they are likely going to do what they always do; overshoot thier target. We are once again seeing metals and oil showing strength while not much is working in the broader market.

Week Ends Mixed

The week ended very, very mixed. If you have been following along you know that distribution continues to take place as the market attempts to climb higher, especially in the Nasdaq. At the same time the Dow continues to threaten a breakout to new highs and a rotation back into the semiconductors appears to be a real possibility. The fact that the Dow is showing strength is forbidding for longs since it implies that smart money is shoring up their defenses by moving into the safer, more heavily traded blue chips. The reasoning is that if the market does shake lower it is much easier to move a lot of money out of large float, heavily traded blue chip positions. Meanwhile support in the chip sector is puzzling when compared to poor action in broader tech. The Nasdaq 100 continues to trade in a nasty head and shoulders pattern and the Tuesday's attempt to nullify the pattern was met with a barrage of selling that led to an ugly intraday reversal. Even so, the following day bulls stepped back in and defended support at the bottom of the right shoulder. 1660 is the bottom of the range and a break below would surely take the wind out of the bull's sails. Likewise, a strong move over 1700 would indeed nullify the bearish pattern and keep the long term trend in tact. With the chips perking up here and given the fact that next week we should experience the traditional end of month buying there is a good chance that bulls will be able to nullify the pattern. Supports are thus far holding, but nevertheless, this is a market that just doesn't feel very strong. We have witnessed a great deal of subtle distribution as stocks continue to get chopped when they trade at the upper end of their ranges. The Dow continues to reveal a flight to safety (realize that institutional money makes up the vast amount of trading volume in the market and it can take weeks for them to set up their positions). Tops in markets are very difficult to predict and prices can continue much higher than it seems logical sometimes. Nevertheless this is a time to tread carefully and a time to either set up short hedges along side your long positions or a time to build up cash positions that allow you to take advantage of the market's next move whatever it may be. Low volatility choppiness that we have been experiencing for the better part of this year is going to lead to high volume and a large move of some sort. Either money that we can't see right now is going to come off the sidelines and bust through this heavy level of resistance the market is now faced with; or, the market will continue to drift precariously higher on light volume leading to a very dangerous situation; or the market will heavily roll over from current levels. Have no doubt though that something big is afoot. Note: Due to a heavy travel schedule this weekend we will not be putting out a report on Monday. We will be back to our normal schedule on Tuesday.

We May See a Bounce, But How Strong?w

Buyers have been stepping in at support and nibbling away at the dips. The market does appear to be gearing up for some more upside. What has been troubling lately though is the fact that every time a stock or an index appears to be making some headway profit takers come in and chop the legs out from under the move. Many commentators are blaming program trading for this type of behavior. If so, this would be indicative of smart money taking money off the table into the rallies, or subtle distribution. There are small pockets of opportunity out there, but this is really just not a good time to be getting agressive.

Bulls Battle Back, but Have Their Work Cut Out

Bulls took a counterpunch yesterday and defended the territory they had to defend. This is an interesting development but we stand by yesterday's analysis. Overhead resistance after the high volume reversal day is going to be formidible. Likewise, money continues to roll into the Dow and the S&P bounced on light volume. These are not good developments if you are firmly planted in the bull camp. On the other hand, tech showed some life yesterday and there is a very good chance we will see the semiconductors make a move. The SMH is bouncing firmly off the all important $35.50 level. The level to watch over the next few weeks is $37. If it can regain this level it may mean that the correction we are looking for may come more in the form of a rotation back into tech rather than a broad reversal of all major sectors.

Bears Snatch Defeat From Jaws of Victory

We have stated rather firmly over the past few days our distrust of the recent S&P breakout. Breadth was our first clue since a decreasing number of stocks participated in the breakout. In addition, the glaring fact that tech did not participate as the QQQQ lagged back at support, provided plenty of reason to be distrustful of any stock rallies from the current level. Finally, volume never confirmed. Now as you can see the breakout is in serious jeopardy of failure as the SPY rolled over on heavy volume yesterday. Now let's take a look at the Nasdaq 100. The QQQQ has been ranging between $40.50 and $42.00 for six weeks now. Yesterday a weak attempt to take out $42.00 was strongly rejected and the index reversed on heavy volume. Also note the uptrend line, now at $41.00 is in serious jeopardy of failure. It is pretty clear that we have an intermediate top in this market and it is fairly clear that we are gearing up for a correction. Keep in mind that there is no reason to panic here. The sky isn't falling and the end of civilization as we know it is not in the cards. A correction can play out in many forms and we have plenty of warning here to prepare our portfolios to handle one should it come. Our course of action is also pretty clear and at the time of this writing we can see one of two scenarios playing out: 1. Yesterday's distribution day will find some relief and prices will once again bounce weakly. If we get such a bounce it should be used as a shorting opportunity. 2. MSFT's after hours announcement will quell any relief rally and the indices will break down over the next day or two. Under this scenario it will be necessary to short weakness. Today we wait to see which scenario plays out.

Is the Cup Half Empty or Half Full?

Depending on how you want to look at it the market is either running on empty here or gearing up for a big rally. We've been exposed to both theories recently and they both have some merrit, depending on what you focus on. We are agnostic about the market at this time and we think a lot of people are in our boat. Certainly the recent breakouts on the S&P and Dow are not to be trusted, but does that mean we come crashing back to earth dramatically or do prices continue to drift higher because sellers are more frustrated than buyers? We don't know. What we do know is that this market is a mine field and navigation continues to be difficult just as it was most of the year last year and just as it has been most of this year. Along with a lot of other participants we would like to see a strong move get underway, whether it be up or down, just to get some exploitable emotion back in this market.

Bulls in Control, But...

If you have been following along you will notice that we have become increasingly concerned with market action lately. We had mentioned last week that we would like to add some short hedges. Our reasoning on this issue has to do with decreasing breadth as the market has moved higher. We frankly don't trust this move. Nevertheless, momentum has been picking up on the upside and while we believe that this latest bullish market move is on shaky ground and not to be trusted shorts are likely going to get burned unless they have deep pockets. There will be a time that this market needs to be shorted, but it is not quite here yet. In fact we could be moving toward a blow off type move, which will suck in a lot of retail money before a real correction ensues. There is no reason to be afraid of this market and money can be made on the long side. We just want everyone to keep in mind that the foundational structure that this move is building on is not sound and we want everyone to be prepared to switch sides of the tape to the short side when it does become necessary to do so.

Option's Expiration Skews Analysis

Any analysis we can offer in addition to what was provided yesterday will be tainted with the fact that options expire today. QQQQ contract writers are very likely going to get the price down to $41, the number representing maximum pain. Technically such a move is meaningless. It means that the price will remain in the trading range it has been in for the better part of the past six weeks. $40.50 still represents the bottom and $42 represents the top so unless one of these prices are breached we remain in a range and must think about the market in ranging terms, not trending terms.

Option's Expiration Skews Analysis

Any analysis we can offer in addition to what was provided yesterday will be tainted with the fact that options expire today. QQQQ contract writers are very likely going to get the price down to $41, the number representing maximum pain. Technically such a move is meaningless. It means that the price will remain in the trading range it has been in for the better part of the past six weeks. $40.50 still represents the bottom and $42 represents the top so unless one of these prices are breached we remain in a range and must think about the market in ranging terms, not trending terms.

Market Shapping up Ugly

It could be options games that is causing the tech weakness here, but there are some real reasons why the bearish case is looking more and more valid. Not the least of which is the fact that the old dinosaur the Dow broke out, which indicates that smart money is running for the safety of the big caps. Add to that the severely lagging tech sector and an inverted yeild curve and caution shows up as the most prudent course of action to take in this market. We have been sidelined over the past week as scans have turned up very thin even as indices were showing strength. Tonight we are going to be scouring for short hedges.

Near Term Bullish Breakout

Yesterday the market surprised a lot of people as the S&P 500 broke out to multi year highs and the Nasdaq bounced firmly off support. This is a pattern we have been watching develop for some time on the weekly charts. This is why we have hesitated to sell short when daily charts were at their ugliest. It looks like this move to the upside is the real deal and should continue for at least the next few weeks. We should be able to pull some decent gains out of this move. That said, caution still needs to be exercized here. We need to watch for breadth as the market moves higher. Bears are making the argument that the market is in the process of creating a topping pattern and they cite an inverted yeild curve as the primary reason. We believe that this move is tradable, but it is also a good idea to be critical of the move being ready to switch alegences to the short side if sentiment becomes overly bullish.

We Repeat, Stay Defensive

As mentioned yesterday, the market continues to waver at a point of indecision. There is no real trend here, though the QQQQ sits solidly on support for now. There are threats to QQQQ support, namely the semiconductors, which remain weak. The second shoe may be ready to drop on INTC so agressive trading here is precisely what we want to avoid.

Market at Support, but Stay Defensive

The QQQQ closed where it needed to on Friday and with a high volume spinning top reversal signal. 40.50 is the key price to watch and if selling pressure, which looked to have let up on Friday continues next week the going is going to get awfully tough. Due to the fact that scans do not confirm the strong reversal signal on this index we are not willing to buy agressively here. At this time the market is between a rock and a hard place. It is too late to short as a near term bounce is almost a given. At the same time, until we see money come off the sidelines going long is likely going to lead to more frustration similar to that experienced over the last week.

Blog Update

We have experienced a virus in our system that has caused problems for our analyst. The blog schedule will resume with regular updates next week. Thank you for understanding.

Once Again, Trading Range Continues

There isn't really much we can add to recent comments after yesterday's session. The market continues to trade in a range and no matter how ugly yesterday looked and felt, key support levels remained in tact just as key resistance levels have remained in tact on upside attacks. If the QQQQ closes below 40.50 there might possibly be something to be concerned about. We believe however that the follow through day the bears are licking their chops over is not going to arrive and they will find themselves frustrated along with the rest of market participants of late.

Trading Range Continues

Scans after Thursday's session look a lot like they did after Tuesday. We don't see stocks breaking down, but a lot of stocks are bumping up against resistance. Unless the market can break above the levels we pointed out in the after market report, stocks are likely going to roll back over and go back to the bottom of the trading range. We continue to look at this trading range as consolidation and base-building.

Long Term View is Sound

The market reversed in a fairly ugly fashion on Friday. Normally this would be a strong warning signal but we are under the impression that the reversal was more about end of the week games and not about distribution. There is a strong probability that the reversal was merely program traders manipulating the index prices by working a few high profile index components. Scans just did not back up the weakness that is reflected in the indices. Moreover, if you pan back to the weekly view, index charts look rosy. Take a look at what has occurred over the past four weeks with the QQQQ (NASDAQ 100). Four dojis printed above its 20-week average. The past month has been frustratingly boring and lots of theories have been flowing as retail traders debate on the direction of the market. Shorts have been burned and longs have been frustrated by stocks that don't move. From the weekly view however, this action has been indicative of base formation. Indicators, volume, and price patterns all favor an upside breakout in the not too distant future.

Two Important Levels to Watch

The QQQQ needs to break above $42 before longs can breathe easier. The SPY needs to close over 129.50. Until these two levels are overcome the market should be considered range bound. On the plus side, overhead resistance has been under attack and market breadth has perked up considerably from early week trading.

Bulls Regain Thier Position of Power

Yesterday when the indices sold off we expected to find a very bearish picture when going through scans. Instead what we saw were virtually no strong short set ups and a lot of stocks trading in neutral territory. Contrast these findings with our scans after Wednesday's session. Wednesday the market traded very strongly, reversing technical damage incurred by Tuesday's bear attack. Only this time the scans revealed a strong amount of participation in the move. We found a great deal of stocks setting up very nicely for a bullish move. This divergence should clue us in that the market is gearing up for another move higher. This is verified by the fact that money flow figures have been diverging against negative price patterns over the past few days.