Happy New Year!

The QQQQ has been the dog of the market over the past week, leading the crowds toward more bearish sentiment figures. Contrarian reading of this sentiment, along with the oversold techicals in the uptrend lead us to believe that the crowd, who has been storing money in money market funds is about to put that money back to work at higher prices.

In other words, so many are expecting a bearish start to the new year, that it is likely just the opposite will occur. We wouldn't be surprised if the market continues to struggle a bit near term, but intermediate term technicals are firming up and show that there is a good chance that the market, including the QQQQ may be ready to breakout.

Small Caps Breaking Out or Breaking Down?

Small caps, represented by the IWM (Russell 2000 index), made their way back up to test major overhead resistance yesterday. The long term chart on this index is interesting. Either this group is getting ready to break out to all time highs and keep on going for some time to come, or it is topping here. Why do we say that? Volume has been huge since last spring.



Note the fact that the last time the IWM peaked its head above resistance spring of last year. The breakout failed big time and small caps went into a tail spin. Volume since that time has been overwhelming large so either smart money is accumulating small cap stocks for a big run or they are unloading their shares in expectation of an even bigger failure than last spring's failed breakout. The jury is still out for us.

Momentum Scarce this Holiday Season

Yesterday had a mildly bullish bias as the small caps took over and started moving higher even as the NASDAQ lagged. Overall, however, the strength we were seeing in the market up until a week or two ago has given way to neutrality almost across the board.

Taking a look at the longer term charts we can see a potential scenario shaping up. The QQQQ, as mentioned, lagged yesterday. If you look at the weekly chart it appears to be building a base that could take a few weeks to form. During this base building process, prices could potentially dip down to $42. As long as $42 holds, assuming this scenario is correct, stocks could rally strong mid to late January.

If indeed this is what is taking place, we would expect the S&P and Dow to trade sideways or dip slightly in a grueling base-building process over the next few weeks. As yet, we are not seeing any serious distribution, just a slowing down of momentum that is likely the beginning of a consolidation period.

This week the market should continue to rally, but from what we saw yesterday, the rally may not get far and profit potential is not very strong. This is a stock picker's market right now and just a handful of stocks are showing any real potential.

Subscriber Notes

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Friday's Breakdown Likely to Get Faded

Last week we focused on the trading range that the QQQQ had been trading in. On Friday this range broke down. Does that mean that it is time to go short? Maybe, but probably not. There are a few of reasons why we think that Friday's breakdown will get faded this week.

QQQQ Range: $43.35-$44.75

1. Seasonality: This week between Christmas and New Year is traditionally positive and seasonality factors are particular strong and trustworthy this time of year. This does not mean that this year won't be different, just that the probabilities favor a rally. 2. This is the first time that the QQQQ has pulled back to its 50-day average since the bull market began in August. Pull back buyers defend the 50-day average in bull markets. 3. Oscillators are very oversold at this point. Now understand, oscillating indicators can and do stay oversold for very long periods of time in some markets. However, this usually occurs when the market is trending down. During an uptrend, oversold oscillators are buy signals and at a minimum should not be shorted.

Today: Don't be surprised if the market opens weakly today. In fact, we hope that it does. Weak opens at the beginning of the week typically invite buyers who fade the early weakness causing a strong rally to ensue.

If, however, the market does bounce here, but does not find any follow through buying higher, we will need to reevaluate our bullish posture. This is just an "if" at this point.

Random Trading Offers Chance to Take Off Early Today

The trading range we outlined in yesterday's report remains in effect. Prices closed at the bottom of the range yesterday. Seasonality suggests that prices will drift higher today in front of the holiday. Unfortunately this is about as much useful information as we are able to provide about this market today.

The market is in random walk mode as it ranges within the trading range. Professional money managers who have not yet taken off for the holidays are quite likely to take off today. Volume should be especially low today and price action should be fairly meaningless. This is not an environment to open new trades in.

In fact, why trade at all today? Take off early with the professional money managers. Go home and enjoy your families. Get an early start on that weekend road trip you were planning. Have a wonderful holiday weekend. We plan to. We also wish everyone the best and hope everyone stays safe and has a great holiday.

Rangebound Through the Holidays

Yesterday the market was forced to digest the idea that the government's war on terror – a war that has now lasted longer than WWII – will go on perpetually and will cost trillions of dollars and countless lives. It's a complicated situation and one that will take a while to sift through. For now we find ourselves stuck in a trading range which is likely to last through the holidays.

QQQQ Range: $43.35-$44.75

Thailand Could Have Hurt, but it Didn't

With the market at vaulted prices and traders in a state of controlled anxiety as they seek to find the balance between staying with their trades and not giving back profits, yesterday's scare from Thailand should have been just the news to pull the carpet out from under the market. The fact that buyers used the morning weakness as another buying opportunity was very informative.

This appears to be a market that maintains full rally mode and the uptrend remains in tact and in good shape. There is still a lot of money on the sidelines that can be put to work at higher prices so once again, the trend is your friend and your friend is bullish.

Choppy Market Ahead

For the past three years December has proven to mark a significant market top. So far this December is turning out to follow the pattern. Yesterday blue chip stocks like IBM and GE rallied while the majority of the market was under heavy selling pressure. This is typical topping action.

Money managers, who need to have their money working at the end of the year are parking it in low beta, heavily traded blue chip positions while they are in a mad scramble to unravel their riskier small and mid cap positions.

Selling pressure was felt across the board and should be respected. Nevertheless, bears who sold short yesterday are likely to get burned as market players use the low volume holiday environment to run the stops. That is, new short positions will have stops placed at overhead resistance levels creating a big temptation for hedge funds to run prices back up and collect the stops before they enter their own short positions.

We expect that the market will see a turnaround Tuesday today where yesterday's losses move back into positive territory. This may be a chance to exit long positions and put on shorts of our own. We will need to wait and see how furious the buyers are as they play their hand.

Right now it is absolutely essential to stay patient and not open any new positions. A weak bounce today would be a good opportunity to open some shorts, but as of the time of this writing there are no advantages afforded anyone but the scalpers.

Note to Gold and Bronze members: We plan to issue an update on open long term positions either today or tomorrow. We are waiting for more data before adding to current commentary.

Taking a Cautious Approach Today

On Thursday the market rallied as sentiment had turned overly bearish. Some argue that Thursday's rally was a thrust rally that marks the beginning of the end in the bull market we have been enjoying. Friday's lack of follow through seems to bolster that argument.

The reason that follow through is important here is it helps us determine if Thursday's rally was merely shorts covering after their stops were triggered or if there remains significant buying interest at these levels. There wasn't much buying going on Friday so we need to heed the warning here.

Trading volume is likely to be weak this week as traders start heading for the exits early to go home and enjoy the holidays. In such an environment it is best to wait and gather as much data as possible before making further decisions. That's what we suggest doing today, waiting for more data (i.e., today's trading results) before making any further moves.

Santa Arrives

Sentiment levels skyrocketed into the overly bullish category as the Santa rally arrived in force yesterday. Nevertheless, the gains look to extend themselves into next week as volume levels were solid.

Those doubting this rally will continue to bite their lips as prices continue higher. Even so, this rally should be treated as if it were the end game. It may or may not be, but while good short term trading opportunities are presenting themselves here, a longer term reversal may be developing. Don't be afraid to buy here, but just be aware of the reversal potential and be ready to take profits into continued strength.

Basic Materials Remains the Place to Be

Yesterday dip buyers propped up the market and most sectors closed strong. We noticed a subtle difference, however, between much of the broader market and those stocks in the basic materials sectors. Many of the breakouts we have been watching in the small caps have been coming back as scalpers take their profits and buyers fail to follow through. Many traders are being made to feel like they are trying to climb a greasy pole here. This is what happens when buying interest is waning.

We will probably get a Santa rally over the next few weeks, but the real strength has come from a rotation into the oils and other basic materials (except steel, which suffers from a poor outlook from sector leader NUE). As such, we should see the indices rise into January, but trading is going to be tough for those outside of the basic materials sectors, with just a few exceptions.

The failure of the semiconductors to participate in yesterday's late market strength is telling. Trading tech is sure to cause continued pain and frustration.

Note: We sent a near term recommendation to subscribers today. Please check your email for details.

Update After the Open Today

The market looks vulnerable for a sharp correction. Over the past two days we have seen stocks struggle for traction as they have begun slipping lower. The key area to watch right now is the QQQQ. If this ETF trades below $43.50 it may mean that sellers have gotten the breakdown that can trigger continued sliding.

Nevertheless, the market has yet to digest the Fed meeting minutes released yesterday afternoon. The initial reaction generally is meaningless so today we will see what the market really thinks about yesterday's minutes.

We will be providing another update after the market opens when we can get a handle on what type of sentiment we will see following yesterday's important market moving event. We plan to provide updates on open near term selections between 10:30a.m. and 11:00a.m. today.

Fed Watch Today

The market is once again in Fed-watch mode in front of today's meeting. Meeting minutes will be released at 2:15 p.m. EST. Until this time don't expect much to happen. In fact, trading activity is likely to mirror yesterday's activity. After the meeting we should see some fireworks, which in the final analysis may or may not mean a thing.

The broader market is set up for an upside breakout here, but the potential for a fade (where sellers use the breakout to sell) is strong here. If indeed the broad market breakout does fail it should bolster support in the oil stocks, which have been enjoying a slow rotation as profits earned in the blue chips have been moving into the energy sector.

Tech Weak, but not Broken

After last week's trend break in the QQQQ and then subsequent lower high formation we would expect that the tech sector will continue to be a tough sector to trade. Nevertheless, we will not be looking for this sector to break down here. Microsoft pulled back just above its 50-day average and found huge buying support on Friday. Likewise, the semiconductors, while quite unexciting as a group, have shown good support in the area around Friday's close. It will take some sort of catalyst to break them down.

Oil is coming under a bit of pressure, but most oil sector stocks are consolidating nicely so we expect the pressure to find dip buyers.

Gold prices are likely to come back to support from current levels, but gold stocks seem to be moving contrary to the dollar right now and not the price of gold itself. The dollar has been in a tail spin and its recent weak bounce is likely to be met with more selling. Next month, however, there seems to be potential for the dollar to find support and rally, which means it's probably a good idea to sell into the next round of strength in the mining sector.

Employment Report Should be a Market Mover

We will withhold any predictions today as we await the market's reaction to the pre market release employment report. The numbers in the report have proven to be untrustworthy, but the market tends to take cues from this report nonetheless. We wouldn't be surprised if bears are handed more pain today for once again jumping the gun and shorting too early.

Watch the Lower High

The QQQQ may have made a lower high, which may not seem like a big deal. In trend analysis, however, one of the best tests of the strength of a trend is whether or not it continues to make higher highs. A lower high that appears is like a dead canary in a mine shaft. It's a warning that something isn't quite right. Potentially buyers can power out of this set up and move prices up over November's highs. But if the price rolls over here, look out below.

Commodities, Commodities, Commodities...

The commodities sectors continue to find dip buyers and as oil consolidates near the top of its range, a strong break higher is the potential here. Since the S&P 500 is weighted fairly heavily with some of the larger oil companies such as XOM and COP, stronger oil prices are likely to keep this index afloat longer.

The NASDAQ on the other hand is vulnerable to some sort of correction. We however continue to believe that bulls maintain the upper hand and the trend remains up. The trend break mentioned earlier in the week has resolved itself as dip buyers once again fed a spoonful of pain to the shorts.

Our question is, why short when there are so many great opportunities to go long in the oils and metals? We suppose there is a natural competitive tendency to want to call the top and prove one's self superiority over others by being the smartest one in the herd. The temptation has been a very destructive one for four months now. And, with the trend aging in people's minds, the temptation is probably stronger now than ever.

We've said it before and we will say it again. Tops take time to build and shorting a strong uptrend is a loser's game.

Note: A near term stock selection has been sent to subscribers. Please check your email for details.

Commodities Continue to Heat Up

Yesterday the broader market rallied and oil consolidated. For those not paying attention to the big picture it is easy to get lost and confused as such situations develop. Those paying attention to volume levels, accumulation, investor sentiment, et al, will see that the picture is quite clear here. After the trend break on Friday, the QQQQ rallied on overly bearish sentiment, taking out stops on newly opened short positions. The rally was uninspired though and weak volume and a poor close indicate that yesterday's strength is likely to give way to weakness today. Oil on the other hand, while not exciting to look at, actually performed extraordinarily well. Prices consolidated near weekly highs in both oil and oil-related stocks. By the end of the day minor profit taking turned out to be merrily a shuffling of positions from weak hands to stronger hands. Prices closed near daily highs in this sector and breakouts and trends stayed in tact across the board.

Commodities Continue to Heat Up

Energy Heating Up

As we predicted it might, the QQQQ finally broke its uptrend line during Friday's session. The day must be considered a distribution day due to heavy volume flow. Nevertheless, tops take time to build and we could possibly see another spike higher before any real declines set in. How far the broad market will decline is up for debate, but we have very likely seen as much upside as we are going to see until we first get some form of a correction. When commodities are performing so well, who cares what the broader market is doing though? That is unless you are married to a stock and refuse to shift with the tides as they shift the sand below your positions. Oil prices continue to firm up at their current levels and oil stocks are providing some of the best set ups we have seen in some time. One note to keep in mind related to the energy sector. The sector in general is high beta, which means that reactions to incoming data are magnified several fold. If you keep focused on the bigger energy trend and refuse to pay heed to the day-to-day wild fluctuations that this sector is famous for, there are many opportunities presenting themselves here. On the other hand, if you let the market noise get to you and you narrow your focus too much, then you are likely to get shaken out of a good position right before it makes a strong move higher. When trading this sector it is best to keep stops loose, trading on end-of-day prices rather than paying too much attention to what happens mid day. Note for subscribers: We sent out both long term and short term recommendations today. Please check your email.

Broad Market Trend May be in Trouble

Selling pressure in the broader market, which received some relief on Wednesday, once again returned yesterday. This puts the 4-month QQQQ trend in jeopardy.

On the intraday QQQQ chart above we have drawn out a potential scenario that may unfold if buyers don't return today. Longer term the picture remains bullish, but the immediate picture is starting to look fairly bearish here. Meanwhile, the oils and metals are in great shape. A strong correction on the broader market may ruffle these sectors temporarily, but any dips in the commodities should be considered buying opportunities.