Indices Look Strong but Stocks are not Confirming

Yesterday we mentioned the fact that Wednesday's market felt a lot worse than it looked. This is because while the major indices were holding up, breadth was poor and stocks in general were just behaving badly. Yesterday morning we felt the brunt of this behavior as support levels were hammered and many many traders were whipsawed out of their trades. After the Fed Chair gave his speech, the indices rallied broadly and stocks that had shaken people out came back up, but most on low volume. Not the indices though. They rallied hard on very heavy volume as program trading kicked in at the prospect that interest rate hikes are history; at least for now. After a rally like we experienced in the indices we would expect to find a broad selection of strength and buy set ups. In fact the opposite is true. Today's scans showed that most stocks did not participate in yesterday's high volume index rally. Does this mean that smart money is gunning only a few index stocks to create a picture of strength when in reality there is none? It sure looks that way to us. We are now at the point of the month where we should see funds putting some money to work and that should keep a floor under the market and perhaps could improve the underlying technical situation. As of right now though, this market looks sick to us and caution flags are being raised. We wouldn't short this market yet, but definitely be careful here. Use your stops and don't buy aggressively. Don't get suckered into the idea that the market will rally now that interest rate hikes are done (or likely done). It may indeed rally, but let it show you proof. Don't buy in anticipation because right now the underlying story of the stocks just does not read very well.

Hung Over From a Demoralizing Day

Yesterday's market didn't look as bad as it felt. The Dow was retesting highs and the other indices were bouncing around their support levels. A lot of stocks we are watching however just drifted on a general lack of conviction. In fact, a lot of stocks were really struggling with support. Market leaders like BRCM just gave way to selling pressure and everyone's nerves are pretty much on edge here. We are now rolling into the end of the month with very little direction. Scans today didn't pick up anything that is really worth considering seriously as the lack of follow through in this market makes it clear that stock set ups are more of a gamble than a science. We expect to see buyers step in over the next few days, but we are agnostic about today. Unless everyone got a good rest last night and put their bull caps back on, buying window or not, today may just give us more of the same dreadful struggle that characterized Wednesday's trading. Let's hope our supports hold until buyers dare to show their faces again.

Semis See Signs of Life

The Dow may be ready to implode here but we are seeing a nice rotation into the tech sector taking place. Intel, which looked ready to take another leg down is being pulled up by a strengthening semiconductor sector. This is exactly the kind of strength the Nasdaq needs to see if it is going to make a strong rally.

Waiting Out the Weakness

As everyone who has been with us for a while knows, one of our rules is "Don't trade every day." Despite Jim Cramer's claim that there is always a bull market somewhere, some days just don't make for very good trading. Friday we experienced some weakness on what we believe can be attributed to expiration. Yesterday we did not get a strong recovery from that weakness and stocks again moved back into the choppy mode that has been so frustrating of late. Today we struggled with scans. Set ups that looked promising a day or two ago now look a bit limp. Generally when this happens we will see more weakness before strength returns. At a minimum we would expect to see today start out weak. A late day recovery would be promising, but we may see this slow drift downward continue into Wednesday. Trying to buy this weakness will only lead to more frustration as support levels will likely be pushed against or even temporarily broken. Late in the week however we should start to see buyers push the market higher as end of month buying kicks in. Traditionally this period starts around the second to last trading day of the month and lasts into the third trading day of the new month. Today is a good day to sit on recent gains and wait for set ups to firm up a bit.

Let's Cut Through the Noise to Find the Trend

Note: We apologize for the delay in providing this report. The blog site would not let us publish yesterday, likely because of server maintenance. Information here is still relevant. There are a lot of forces that move the market and depending on how you wish to interpret (or even mine) the data, you can build a bullish or bearish case that sounds very convincing and appears very sound. Our personal position is that with oil over $70, the commodities market in general on a tear, and the bond yield curve threatening to signal a recession, this rally doesn't seem to have much gas in it. We may ultimately be right and the correction we are looking for will very likely come at some point. But what do the charts say? At this time the index charts say that stocks are discounting all of our worries. Again, this may change, but you have to trade the tape that is right in front of you, not the tape that you anticipate. The tape right in front of us remains bullish. Let's take a closer look at the weekly index charts to get a clear picture of the real market direction. The weekly view is a very good tool for stripping away the noise and revealing the true direction. Starting with the Nasdaq 100 (represented here by the QQQQ): On Friday the QQQQ dumped most of last week's gains as oil rallied hard in the afternoon. Is the QQQQ going to now crash? Well, the weekly chart says that unless the price will close below $41.25 anyone who calls for a reversal in trend should be treated as Chicken Little. The sky is not falling here. With the weekly close at $42 we now have a weekly doji right at support. With the uptrend in tact, this is bullish.

Moving on to the S&P 500 (represented here by the SPY): Last week the SPY bounced off the trend, which started in 2003 and closed the week at its highest level since January of 2001. We can find no reliable signs of distribution here. In fact, our calculations reveal continuing accumulation. This is not bearish folks. We don't know how the market is going to respond to the worries we mention above over coming weeks, but technically the S&P is set to launch much higher.

Now let's look at the semiconductor sector (represented here by the SMH): The tech sector is going to be a lead weight around the neck of the market if the semiconductors can't find a bid. The SMH, as you can see below, is primed and ready to rally off of support. Unlike the S&P, there are signs of distribution in the sector, but this does not appear to be a threat to a projected rally. Unless the SMH closes below $36 any remarks that the bears have taken control of the market should be ignored.

Bottom line: Despite where you think the market is going or where you think that it should go, those who wish to make money need to react to what the market is doing right now. Right now the weekly charts are bullish so we stay long. This does not mean that we can let our guards down and stop using good money management. Indeed now is the time to exercise even more disciplined money management practices. Take profits off the table by selling at least partial share sizes into strength. Selling into strength frees you up to buy the dips and gives you the freedom to look at your positions much more objectively than those who hold and hope. This is an important lesson that takes pros years to learn. Save yourselves the time and heartache by learning today what takes others a lifetime.

It's a Rally Until it Isn't

We want to clarify our position on the market today. Recently we have made some bearish remarks regarding the longer term outlook of the market. We need to qualify these remarks. We have a thesis that the market is nearing levels where smart money will start to distribute shares to retail. If we are right this process could take several weeks before a real top is put in place. Right or wrong, our thesis about what is going to occur long term should have no bearing on how we play the current market. It is very important to play the market that is right in front of you. As hungry bears learned on Tuesday this week, it never pays to pick a top in a bull market. Bears lost money trying and ironically they actually helped feed the rally when they were forced to cover their shorts. A rally is a rally until it isn't. Yesterday some heavy distribution took place in the gold and silver markets yesterday. A top is probably not in place in gold, but it may be in silver. At a minimum we should see both groups pull back to their trend lines and a short may be had by those nimble enough to find a good entry in this wildly volatile group.

Still Rising, but Long Term Trouble May be Ahead

The rally continues and some very nice set ups are emerging. We believe that there is still money to be had short term. However, and it's a big however, we have to be prepared for reality to kick in next week when options expiration is out of the way, the bond market's continued weakness wears, and high energy prices refuse to pull back. We believe that this rally is the opportunity for long term players to sell and that we may be setting up for the first serious correction since early 2004. If the bulls can use strong tech earnings to push the QQQQ past $43, we may see a tradable rise into the $44 and even $45 area. Considering the great set ups we are now finding in our scans, such a scenario is a real possibility. Traders can make good money on the long side in this situation. As we mentioned yesterday, play what is in front of you, but don't get so caught up in the enthusiasm that you forget to take profits along the way. There are still some good opportunities to enter at support, but we would be very careful about chasing breakout stocks here. Next week we will get a better feel for how this immediate term rally is going to hold up. Right now we just want everyone to keep in mind that this rally, whether it takes us to fresh new highs or poops out here, is very likely the rally that smart money will use to do some real distribution.

Can Bull's Now Capitalize on Momentum?

Yesterday the stars aligned for the bulls. On Monday bears, for whatever masochistic reason, tried to sell the market early and bet on a breakdown. As we outlined in yesterday's report, a selling opportunity is coming, but it will be the rallies that create selling opportunities, not breakdowns. Betting on breakdowns near market tops is a fool's game. Monday's sell day merely took market indices back near support levels and the OEX crowd, one of the best contrarian groups, became overly bearish, buying two put options for every call option. Tuesday, bulls recognizing a free gift when it is handed to them, bought the market open and strength endured right up to the FOMC (Fed) meeting minutes release. Bears likely thought they had the opportunity to sell the news but bulls were handed another gift; the Fed made their strongest statement yet that interest rate hikes are nearly finished. The key phrase issued yesterday makes it clear that rate hikes are about to become history (at least for the time being: "Most members thought that the end of the tightening process was likely to be near, and some expressed concerns about the dangers of tightening too much, given the lags in the effects of policy." Today bulls face another challenge; can they manage a follow through? If recent patterns are repeated then the answer is only a qualified "maybe." Yesterday may or may not have finally convinced bears that an uptrend is still in tact. If they are convinced, they will cover their shorts and contribute to the rally by becoming buyers. Bulls also have to contend with continued oil prices, which could be heading toward the unthinkable $80-$90 range (remember when $70 was still unthinkable?). The main thing to do here is just play what is in front of us and be ready to react when the situation changes. Right now bulls have some momentum starting, we are getting some good set ups and stocks are still ignoring high oil prices. Over think this situation too much and you might miss out on some nice gains.

Shorts Once Again Jumping the Gun

Short positions by those who prematurely bet on a breakdown are likely to add fuel for a snap back rebound. We believe that this market is going to provide a shorting opportunity very soon, but it will be shortable once it reaches back near recent highs. Shorting breakdowns is usually a recipe for failure and we believe that will be the case here. The put:call ratio is back in overly bearish territory so support should be in place very close to current prices.

One Last Rally Likely in the Cards

Major indices have support at their current levels, but the uptrend started in October of 2005 is severely weakened. We expect support to hold at this point and we should see one last rally take place. It is likely that this rally will give long term holders a chance to exit their positions and should give traders a great shorting opportunity. We don't expect the market to reverse course harshly, but the uptrend has come a long ways without a correction. It is nearly due, perhaps as early as next month, for a 10%-15% correction. In fact, this toppy market has been tough on traders due to overhead distribution. Rallies have been getting stuck in the mud of selling above. Even so, we are more than likely heading into a trader's market where it will be long term holders that are most frustrated. Due to rising interest rates and global economic worries due to rising commodity prices and continued geopolitical problems in the Middle East, we could easily move into a trading range market that will make for some very nice trader's reversals, but that won't make a lot of long term progress.

Base Building Continues

Stocks continue to build a base at current levels and it is very likely that bears have put in a floor for us. Yes, this is a strange statement but the fact is that when either bulls or bears become overly exuberant or one emotion (fear or greed) begins to dominate the market prices are very likely to reverse from the near term direction it had been heading. In this case that means we should have a floor from which stocks will now begin to lift off from. Yesterday OEX traders bought twice as many puts as calls putting this sector in clearly overly bearish territory. Bonds pulled back, but we stated yesterday they might. This is now base building and not a slow bleed. Stocks may continue to chop around in front of the long weekend but we believe a tradable bottom is now in place. Note: The market will be closed tomorrow for the holiday weekend so we wish everyone a safe and happy holiday. Our schedule will be back to normal on Monday.

Carving Out a Bottom

The bond market, which has kept the stock market under pressure over recent days looks to finally be ready to provide stocks with much needed relief. Near term there may be some more backing and filling, but the bleeding has stopped and base building is underway in that market. Meanwhile, the Nasdaq has been the baby that has gotten thrown out with the bathwater over the last three days. Nasty pullbacks such as the one just experienced generally culminate with an unloading of the best positions right before the turn. Note the Nasdaq 100 ETF, the QQQQ:

For weeks this index struggled with the $42 resistance area. After breaking above on decent volume and basing the price sold back down to the $42 area, now support. Theoretically this area should lend support but we have to wait and see how the market handles this today to be sure. Volume was heavy on the pullback so there is no guarantee that support will hold, meaning we will be looking for a return to trend support at $41.50 before we get a buyable bounce. The Dow is in similar shape as money continues to flow out of the small cap Russell 2000 stocks into blue chips. Yesterday's bleeding stopped right at the Dow's 50-day average and right at it's uptrend line. The S&P on the other hand didn't fare so well yesterday. Recent breakout support failed to hold indicating that the breakout (which we have been calling into suspicion over the past few weeks due to its low volume) has failed. Unless a miracle occurs we would expect the SPY to pull back to the $127-$128 area before finding support. If the QQQQ can find support and the SPY can tread water we could see the divergence between these two indices start to even out a little, which would bring indices back to their norms.

Bottom line: If you are in the mood to short this market after three days of onslaught, you are too late. A lot of short positions were opened after Friday's sell off and negative breadth has hammered virtually everything out there. Action over the past few days has been very disheartening for longs but we are either at support or very close to finding solid support. Those short positions put on could potentially add fuel to the fire on a strong rebound if the bond market does indeed provide a relief rally over the next day or two. If you are long and crossing your fingers for support to hold the best thing that you can do here is continue to cross your fingers and hold and/or considering averaging in at these lower prices. Averaging down is not normally the best policy, but considering the fact that we are much closer to a bounce than to more real decline it makes some sense under the circumstances. We would avoid metals stocks at this juncture. They have gone a long way very quickly and could correct deeply. Corrections in this sector are still buying opportunities, but right now the sector is risky.

Upward Drift Should Resume Soon

Yesterday provided just what we would like to see after a panic sell off day like last Friday; a very light volume day that lacked follow through qualities. Bonds have yet to give any relief to stock prices but remain oversold and a relief rally should be in the works shortly. Stock prices want to drift higher from current levels and bears are surely frustrated that they couldn't get sellers to show up on Monday. Look for prices to slip a bit lower before finding support, but don't get overly aggressive on the short side. . We have a number of positions we are watching that have been pulling back to support. We don't want to be overly anticipatory here however so are waiting for the bleeding to stop before picking anything up. As stated, today may see a bit more weakness, but we expect that we are fairly close to a snap back reversal. Today is a good day to wait for better prices.

Bonds Sold Friday, but are now Really Oversold

On Friday we quoted Bob Carver regarding the bond market and its potential reaction to the employment report as follows: "If the bond market has taken his prediction to heart and the numbers turn out to be weaker than they expect, we could finally get that countertrend bond rally we've been looking for. And, that would certainly help the stock market rally as well. On the other hand, a very strong Employment Report could forestall such a rebound in bonds. At the present time, bonds are extremely oversold, so it will be quite instructive to watch the reaction of bonds to the report. " On Friday bond yields initially retreated as media called the employment numbers a "Cinderella Report" where numbers were not too hot, not too cold, but just the right mix to get the Fed to lay off future rate hikes. Bond traders took this initial enthusiasm as a chance to short though and rates soared causing a strong intraday reversal in the stock and bond markets alike. Note Bob's commentary: "…interest rates, which had appeared immune to Fed rate hikes up until the last few months, are soaring in a "bull market". When rates soar, bond prices drop and that causes the relative yield advantage of stocks over bonds to narrow. It also increases the cost of doing business and that reduces earnings. Thus, the result is that when interest rates trend higher, an extra "drag" on stock prices is introduced. When the drag becomes too large, selloffs result. Friday was one of those occasions. Bonds initially rallied on the Employment Report, but short sellers hammered that market, sending interest rates soaring and stocks came tumbling after, just as we warned you would happen. " Bonds, which were oversold on Friday before the further sell off are now very oversold however and we are even closer to that relief rally predicted, which should give stocks room to continue the uptrend shortly. Look for an initial follow through lower today, which could then easily reverse as more bears are trapped as they once again miscalculated the top in this market. Trying to pick and short a market top is a lot like the old story about the boy who cried wolf. Eventually the wolf is going to arrive and eat the sheep but there will be a lot of false warnings that occur before that happens.

Bonds to Make or Break the Market

The indices actually look quite healthy on their weekly charts. There will certainly be some backing and filling along the way, but the immediate trend is up and the dogs are running. We don't need to mention that breadth figures are still poor and that this run might be heading up on fumes because a rally is a rally is a rally and profit can be made only by trading with the crowd when the market is rallying. If the QQQQ can make it over $43 we see no reason why it couldn't run to $45 over the next four or five weeks; especially now that the semi conductors are coming along. "One of the issues that is now giving the market some relief, where it has been under pressure over recent months is the bond market. Today the market could get a real boost from the bond market depending on how bonds respond to the employment report to be released before the open today. Bob Carver explains this better than we can: A data challenge will come Friday morning in the form of the March Employment Report. While the headline numbers are purely fictional in terms of new jobs, unemployment rate, etc., the market will lap them up and trade on them (as they say in computer circles, "Garbage In, Garbage Out"). According to the current Treasury Secretary, John Snow, we should be looking forward to a strong Employment Report (his basis for such a prediction is uncertain -- most observers suggest his role is more of a cheerleader). If the bond market has taken his prediction to heart and the numbers turn out to be weaker than they expect, we could finally get that countertrend bond rally we've been looking for. And, that would certainly help the stock market rally as well." On the other hand, a very strong Employment Report could forestall such a rebound in bonds. At the present time, bonds are extremely oversold, so it will be quite instructive to watch the reaction of bonds to the report. If the report shows a strong economy and bonds don't sell off and turn around and rally, it indicates at least a short term trend change in the bond market to the upside. And, that would help light the fire under the stock market. Often it's better to simply wait until the news comes and gauge the reaction of the market to the news before taking a position. We've seen the bond market rally in the face of extremely bad news before (to the bond market, a strong economy is very bad news indeed).

Chips Finally Confirm the Rally

We were wondering if it was going to happen at all, but the weekly buy signal the semiconductors gave finally proved itself to be legitimate. As early as Wednesday morning the SOX index looked like a great short as it traded in a bear flag. Shorts were disappointed as the index, along with the SMH, exploded higher. This at least answers one question about this bull move. Sentiment is getting overly bullish, so look for a pullback at a minimum near current levels. This rally does look tradable and the longer term concerns we have been expressing shouldn't get in the way of making money in the short run.

Trade this Market, but don't Buy and Hold Here

The QQQQ has completely negated the head and shoulders top pattern with yesterday's follow through above $42. The only problem we have here is the lack of confirmation by the semi conductors, which still lag near their lows. Moreover, Intel looks like the second shoe is nearly ready to drop as it rolls over into the abyss off of its falling 20-day average. Since INTC is generally the leader for the chip sector, a gap down could have the potential to break support on the SMH (semiconductor holders ETF). We expect this market uptrend to continue, but there are serious signs of weakness here that make us think that large institutional money is using the rallies to sell. Institutional distribution can take place over weeks and even months but just be aware that sector divergences, such as the one mentioned here today, declining breadth on down days, and poor choppy trading in general show that we are getting closer and closer to a correction. On that note, we should once again mention that we would embrace a correction. It will clear out the extra risk in the market and reset the stage with better set ups all around. Likewise this market needs a good dose of increased volatility to reintroduce fear and greed. Complacency over the past months has made pulling money out of the market tougher and tougher. We can manage a correction as it is not likely to blindside us. It will blindside players who have gotten complacent, but that is the nature of the market.

Market Not Ready to Break Down

The first quarter of this year represented a strong showing by the S&P 500; one of the strongest quarters in some time. You could have fooled us. This market has not been an easy market to navigate. Every up day seems to have been followed with a distribution day, especially over the last few weeks. The trend is still up but we have to wonder if the trend is being used by smart money to unload their positions. Case in point: the SPY broke out above overhead resistance during the middle of March. At the time we remarked that the breakout was not to be trusted due to the lack of volume. Now over the last few days every attempt to rally out of this breakout has been shot down mid day leaving a series of selling tails on the daily candlesticks. Each mid day rejection and poor close represents a day when sellers used the rally attempt to unload their positions. This weekend we highlighted the fact that the chip sectors was trading at support and providing a weekly buy signal. We may yet see a rotation back into tech that is validated by a strong move in the chips. As of today however we just racked up more evidence that something is not quite right below the surface of this market. INTC sure isn’t helping the situation in the semis either. We don’t want anyone to panic at this stage as this situation we are describing is still playing itself out and the final outcome is not carved in stone. It remains a good idea to tread lightly in this market and stay hedged in the commodities sectors, which are acting much better at this stage than the general market is. Despite the weak close yesterday we believe that those who aggressively shorted yesterday’s decline might be in for the same type of frustration that longs experienced after buying yesterday’s open. From what we can decipher from scans, yesterday’s late reversal was just more market noise and not necessarily the final nail in the coffin that is going to lead to a waterfall type slide that bears are hoping for. More likely we will continue to experience more choppy trading this week that is going to frustrate all but the most patient of participants. Ultimately this action is going to lead to a larger correction. We just don’t believe we are there quite yet.

Despite a Feeling of Weakness, the Charts Say Buy!

From a daily perspective Friday’s weak close left much to be desired. The semiconductors especially look weak at this juncture. Panning out to a weekly view however the picture changes and a more bullish perspective starts to emerge. Note the fact that the SMH, though performing poorly on Friday, merely closed out the week with a doji at long term support. Indicators (not shown) reveal a strong buy signal on the MACD histogram and improving money flow into the sector. As weak as this market has “felt” lately there can be no clearer point where a market demands to be bought. Think about this in terms of an airplane pilot who is flying through heavy fog. His senses may tell him that he is listing or that he needs to adjust up or down but under the circumstances he must ignore his senses and fly according to what his instrument panel is telling him. In other words, his senses are unreliable and he must not follow his instincts but rather his training. Likewise, instinctually the market is telling us that we must sell but the charts are saying buy, buy, buy. A QQQQ failure at $42 and an SMH breach below $35.75 would negate the buy signals here, but we must buy here and react to a market breakdown if and when and only when such a breakdown occurs. "Ours is not to reason why, ours is but to do and die" -Alfred, Lord Tennyson's Charge of the Light Brigade.