Wait For Confirmation Before Stepping Into the Fray

Volume was extremely weak last week due to holiday trading. Likewise, Friday's 1/2 day doesn't offer us much of a clue as to what to expect as we move into the end of November. Trade set ups should be eyed with suspicion until we see how the market behaves today now that traders are back from their extended weekends.

Today is just not a good day to be stepping into the fray and making new bets. As we have stated so many times here, let others assume the risk during times of uncertainty.

The charts: The NASDAQ continues to outperform the financially heavy S&P and Dow indices. Last week, in fact, the horn was tooted indicating that a Dow Theory sell signal was incurred as the Dow index closed below its August lows.

In general, we don't think the charts alone offer us much to go on here.

The bullish case: Stepping back and taking a look at the bigger picture, we believe that a bullish case has merit though. The charts alone may not tell us much, but if you factor in charts, sentiment data, and seasonality, and insider behavior a bullish picture begins to emerge.

Sentiment readings are at extremely bearish levels. Given that we have just endured a huge sell off and are under oversold technical conditions, overly bearish sentiment can only be read as bullish here.

Insider behavior, according to Mark Hulbert, has turned extremely bullish over the past couple of weeks as the markets were selling back to support:

It turns out that insiders in recent weeks have dramatically cut back the pace of their selling. In the Vickers Weekly Insider Report published Monday, Argus Research reported that in the week ended Friday, the average insider sold just 1.68 shares for every one share that he bought. That's well below the historical average for this ratio, and well below where the ratio stood as recently as early November, when it stood at 3.04-to-1.

Seasonal factors and end of the month factors add to the bullish case here as well. Typically this week is one of the more bullish weeks of the year and December tends to be bullish as well.

The bottom line: The bottom line here is that charts look ugly, but are oversold. Probabilities strongly favor the bulls if you factor in all available data pieces. Nevertheless, the smart move here is to let the market confirm or deny the bullish case here before acting. There is no need to put money to work until the market starts to move again. Right now it's consolidating, but when its next move starts, there will be plenty of time to position yourself to profit if you follow your entry rules and stay patient.

Here's what to look for before acting: The QQQQ, as seen below, is trading in a pennant pattern at uptrend support. This pattern can break either to the upside or the downside. We suspect it will break higher, but it's best to wait for the break before putting more money to work.