Buckle Up, Here Comes the Fed Again

The market remains in a holding pattern in front of today's expected rate cut. There is nothing we can add to this observation. When we get a chance to gage the reaction to the cut, we may once again have something meaningful to say about the market. Until then, buckle down and get ready for the ride.

Stay Conservative Today

The market is in a holding pattern in front of tomorrow's Fed decision. It remains unclear what type of rate cut is in store and how the market will react to Uncle Ben's decision.

Now is a time to be conservative, not to make bets on Wednesday's market response. No one keeps money very long trying to get lucky.

S&P Looking Strong

The sharp recovery of the S&P 500 last week provides that index with a strong start to a handle on a cup and handle pattern.

Over the past few weeks now we have been arguing that with bearish sentiment so high and the fact that everyone hates this market so much that now is the best time to be in the market for what has the potential to be a major bull trend.

If indeed the S&P breaks out of a cup and handle pattern here we could see prices rise over the next 6-18 months.

We will say it again. The media and market analysts don't talk about impending recessions at market tops. Put your tin foil conspiracy hats on when analyzing media comments about the stock market. Smart money needs an enthusiastic retail market to sell to at market tops. The media doesn't understand the market and they tend to report the news that is being fed them by smart money.

When the media starts cheerleading it will be time to start selling into the rallies. They haven't started yet.

Focus On Chem While the Market Stews

The market is in a holding pattern and may stay that way until next Wednesday's Fed decision. Meanwhile, there is a sector that offers an excellent trend: Chemicals are in an uptrend and continue to offer high probability long opportunities.

There is no sense struggling with the areas that aren't decissive in this market. Chemicals, as we saw with MOS yesterday, are decissive right now.

What a Wall of Worry Looks Like

Volatility has been heavy over the past few weeks and yesterday didn't disappoint. Early weakness on Merrill Lynch's earnings, however, gave way to buying in the afternoon keeping a strong bullish bias alive.

Moreover, the Walker sentiment report came out last night and we find that the overtly bearish sentiment that was reported last week persists this week.

This is a market that it has paid to pay attention to sentiment with. Everyone hates this rally and hated rallies tend to keep on burning the bears and working their way up the wall of worry.

All the news is negative. Sentiment is negative. Analysts are grudgingly going along with the rally, but complain about impending recessions and poor earnings. And the market takes two steps forward and one step back and another two steps forward again.

This, folks, is a wall of worry.

Bullish Tenacity Keeps Uptrend Alive

One word can be used to describe the bulls in this current market; relentless. The banking sector is under massive selling pressure. Housing looks ready to make another leg lower. The S&P has suffered severe technical damange. And yet, the Nasdaq continues to march higher. Moreover, of the 600 odd stocks in our 52-week high lis, more than 60% are exhibiting bullish divergences on indicators such as money flow and money stream. What we have here is a mixed market with an advantage to the bulls.

Any Rally This Week Should be Shorted Into

The market bounced yesterday, but as we mentioned in yesterday's report, any bounce this week should be considered highly suspect. The Nasdaq is still in an uptrend, but the broader market has collapsed and is likely to continue to be a lead weight around the neck of the majority of stocks.

Under these types of conditions, long set ups tend to fail, frustrating those who fight the trend by giving them just enough encouragement to buy again. Once they buy, however, they find that prices refuse to make new highs and then within a few days prices bleed frustratingly lower until stops are triggered.

We don't know what type of correction we are facing here, but probabilities are high that long positions are going to struggle for a while. For now, it's best to focus on selling the weakest areas of the market rather than trying to buy the strongest areas.

S&P Failure Like a Rock Around Market's Neck

Last week we went against the crowd and went long again after making money on our short position HOV. We decided to do so as market sentiment was overly bearish and trading on sentiment has proven to pay off well over the past few months. This time we were wrong.

On Friday the failed breakout on the S&P 500 proved to be a lead weight around the market's neck and stocks sold off heavily. Most of our long positions stopped out.

Sometimes the market catches you unaware. We have been making money on the majority of our trades for two months now, so staying with the uptrend has been the right thing to do. We got caught pushing our luck on Friday, but that's what stops are for.

The alternative would have been to avoid all risk over the past two months and not make any money.

What we want everyone to keep in mind is that timing the market is an imperfect art. No one gets it right every time. You can, however, make money consistently by making sure you lock it up quickly when you find yourself on the wrong side of the tape.

Mixed Market Raises Anxiety Levels

The S&P closed below its 20-day average while the NASDAQ continued to power higher yesterday. Mixed performance in the indices can easily be explained by one word: Banking.

The S&P and Dow are loaded with banking stocks. The NASDAQ does not have much exposure to this very weak sector. What message the weak banking sector is sending about the market's macro issues here is probably not a positive one.

Even so, we continue to find good long side set ups. On top of that, near term sentiment is highly negative. Finally, we are entering one of the most bullish of seasons. Adding up all three of these factors outweighs the negatives for the trader. Let long term investors worry about the economy. Traders should be focused on the tape that is right in front of them.

The Bears Were Wrong; Again

Over the past few days the market has been under selling pressure. The S&P 500, which experienced a weak breakout last week, appeared to have experienced a failed breakout this week. This fact, and the fact that no one believes in the tech rally that just won't quit and oil prices reaching near $90/barrel, has caused a bearish din amongst pundits that is nearly ear-shattering.

A few weeks ago we had this same situation and if you recall we used the bearish sentiment as a reason to get aggressively long. Doing so paid off very nicely.

Over the past two days we got short and tightened up stops on long positions because technically it was the right thing to do. Today, however, it is time to react quickly to this fast moving market, which demands agility to survive, and get long again.

Over the past few weeks we have been developing a list of strong performing stocks to watch. Some of those stocks have underperformed and experienced heavy selling pressure. Some though showed their true colors and their true colors are very bullish. Stocks that didn't succumb to selling this week are set up to rally hard.

We suspect that roasted bear is still on the menu. Don't listen to the noise. The charts and the sentiment readings are telling us that the correction is over.

Mixed Conditions in Front of Earnings Season

The S&P broke its trend line and is very weak here. Transportation is rolling over, which is a warning sign to the Dow theorists, who need transports to confirm the breakout.

Primarily, we take the market's technicals with a grain of salt here. This is earnings season and earnings season is news-driven, not technically driven. It's hard to get serious about the short side in anything but the weak builders and real estate sectors. It's certainly not a time to get aggressively long either.

As earnings roll out over the next few weeks, we should start to get better set ups once again.

Sector Watch: Metals are mixed now with some industrial metal stocks exhibiting strength and others are under severe distribution. Gold looks to be making a dip in an uptrend. Oil stocks are neutral here. China is now under distribution, but we would hesitate to short it as it can be extremely volatile. Shipping stocks, like metal, are mixed.
The stro
ngest opportunities are now on the short side in the builders and real estate sectors.

Trend Watch In Effect

The market is in a very tough spot here. The S&P broke out, but volume was not intense. Yesterday the S&P looked like a breakout failure intraday, but by the close it was able to move back up and close at new support.

It's tempting to join the other pundits and repeat the worn out idea "market participants are not willing to make any bets in front of the slew of earnings," but that may in fact be what we are faced with here.

As a result, no one can really know what to expect next. The uptrend is still in tact. Commodities continue to behave well. The future probably depends on projections that come with all the conference calls in the next few weeks.

As we noted yesterday, avoid everything but Energy, Metals, Asia, and Shipping.

The Right Thing to Do

On Friday, dip buyers kept the trend alive despite Thursday's hard late-day sell off. The S&P closed the week above its breakout, so double-top watch is now off the table and false breakout watch is on the table.

The tech sector is way overbought and is vulnerable for a sharper correction.

The market is getting tricky to navigate after so many weeks in a row without a serious pull back. We would focus primarily on the hot sectors (China, Shipping, Oil, Gold, Metals) and avoid everything else for now.

Oh, and keep tight trailing stops. It's the right thing to do.

Key Reversal Day May Change Market Character

Yesterday the market gapped higher in the morning and the bull trend looked healthy throughout morning trading. However, in late day trading it suffered a key reversal and indices sold off hard on volume.

This potentially marks a character change that needs to be carefully monitored.

Two likely scenarios to follow are:

Bulls refuse to give up the trend and after a shallow dip, prices will move back up to fresh new highs.

Or...

A top of significance was put in and prices will trade sharply lower in coming weeks.

At this point no one knows.

Focus On What's Working in This Market

Are we starting to see a pattern develop here? One day up followed by one day down? The broader market was stuck in the mud yesterday and stocks outside of a few strong areas in tech and the commodities sectors aren't offering up a lot of confidence to buy in at these nosebleed levels.

It's probably best to be really impatient with the market here and just focus your attention on what is working and weed out of your portfolio that which is not.

And We Now Have Follow Through

We got the follow through we had been looking for on the S&P 500. This means that the broader market is just now starting to participate in the tech and commodities rally.

Even so, it is best to focus most of your attention on the high flying commodities here. Oil and metals stocks are just now breaking out of strong chart patterns like cup and handle, double bottom, and inverted head and shoulders.

We would categorize these patterns as longer term breakouts. Pennants and bull flags are short term patterns that project short term moves. Patterns like the cup and handle project multi month, and sometimes multi year moves higher.

We appear to be at the threshold of a major move in commodities.

Lack of Follow Through Concerning

Yesterday's lack of follow through on the S&P is concerning, but it's not a deal breaker. Yet. We need to watch carefully here to see if the bullish trend can reassert itself. Bulls need to step up to the plate and buy here; if they don't the market will be vulnerable for a sharp correction.

S&P Breaks Out

The S&P did indeed break out Friday. Over the next couple of weeks we will be looking for follow through. As long as there are no major fades this week, the bulls are looking at a good fourth quarter.

S&P Coiled and Ready

The S&P has been coiling into a bullish spring near its highs over the past few days.



This is very bullish.

As noted earlier this week, bears are looking to fade the breakout attempt because they believe that a double top is forming. The problem with this strategy is that double tops are very rare and betting on one offers one of the lowest probabilities offered in the market.

Right now the recovery from August lows looks too sharp. As Einstein reminded us, however, everything is relative. It may be a sharp recovery when considered from a smaller time frame. And, were we not in a bull market it would make good sense to argue that prices are destined to return to their mean.

But we are in a bull market. In September 2006 the SPY was set up exactly like it is now. Then, as we suggest will happen now, no double top was to be had. Prices did not regress to their mean, but the bull trend had its way and bears betting on downside contributed to the rally as they were forced to cover at higher prices.

Recent price action would suggest we will see the same thing occur this year.

S&P Watch, Day 2

Once again, it's S&P watch. The market lost some momentum yesterday, and we may see prices remain flat for a few more days.

To our eyes, the S&P looks a lot like Microsoft (MSFT) a year ago September. Keep in mind that double tops are very rare in the market, so it is advisable to bet against them. September 2006, MSFT was faced with a double top. Momentum waned mid month. Then late in the month it powered higher and didn't look back for several months following.

Of course we can't know if the S&P will do the same here, but these types of patterns oftentimes repeat in the market so this idea serves as a bit of a road map to watch for.

S&P Watch

There is not much new that can be said about the market here. Just keep in mind that all eyes are on the S&P here. It is near breakout levels and given strength in the other sectors, it seems likely that it will indeed break out here. Some consolidation first would be welcome, but not absolutely necessary.

Small Caps Starting to Take Over

The new quarter got off to a raging start as bear's arguments for a double top stung them badly. Most impressive here is the rotation into the small cap sector. The Russell 2000 is finally getting some play as money starts to move back into the more speculative stocks again.

There has been in place a flight-to-safety and the small cap index has been lagging. We suspect that the faster moving small cap stocks are going to start offering some excelling opportunities in coming months.

Once again, dips are buying opportunities. Days like yesterday are fun, but they don't offer the best entry opportunities. Weak days, like last Friday, when the bears are roaring and the bulls are biting their nails, are the days to get aggressive with your buying. Embrace the dips, don't fear them.

Trend Still Up

The quarter ended with a bit of a whimper. This has caused all kinds of speculation about double tops and every other sort of fearful and bearish arguments that distrustful commentators can come up with.

Frankly, we think all the noise is nothing but evidence for a wall of worry. The market is clearly in an uptrend. Tech is clearly leading the way higher, the way one would hope a healthy bull market would enjoy. Prices are clearly ready to test overhead highs.

We hate to predict too much about this week's price action. If we had to make a guess though, we would say that given the level of fear and the bearish predictions getting thrown around, that the market may have some games up its sleeve. We can see the potential for a scary shake out this week that quickly whipsaws the shorts yet again.

Dips remain buying opportunities.

Note: Here's a story that's not necessarily related to the market. We find Dr. Pausch's story to be highly moving and it serves as a great reminder that life is truly precious.

A Beloved Professor Delivers The Lecture of a Lifetime

Randy Pausch, a Carnegie Mellon University computer-science professor, was about to give a lecture Tuesday afternoon, but before he said a word, he received a standing ovation from 400 students and colleagues. He motioned to them to sit down. "Make me earn it," he said.

What wisdom would we impart to the world if we knew it was our last chance? For Carnegie Mellon professor Randy Pausch, the question isn't rhetorical -- he's dying of cancer. Jeff Zaslow narrates a video on Prof. Pausch's final lecture. They had come to see him give what was billed as his "last lecture."