Prices Bleed Off In Complacent Environment

Volume dried up as the SPY ran back into its falling 50-day average spurring us to close our long positions and advise members to start putting short positions back on. Indeed, the market turned into the type of slow drip lower where prices bled out the previous week's gains drip by drip.

When market's panic and sell off on heavy volume, it tends to attract contrarian buyers who note the spike in fear as potential for some type of price reversal. More recently, the Fed has been extremely sensitive to the market's moves and each panic has been met with another dramatic rate cut that has frustrated short holders who were otherwise right about the market's direction.

What we are seeing here, however, is the type of market that wears out the longs. It's the type of trading that allows recent buyers to hold and hope for some type of reversal. Generally you can expect the slow bleed lower to end in some sort of panic wash out event which occurs when late buyers finally give up and sell right before prices reverse once again.

Probabilities remain with the sellers as we start out the week. Nevertheless, it is important to not remain married to an opinion. Keeping a stop over Friday's low is probably a prudent measure to take in case this market decides to for whatever reason, reverse on a dime.

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Outlook:

While prices followed through lower last week, it is getting a bit late to short new positions.

Watching And Waiting

Today is an important day for the averages. If prices close near or below yesterday's close an important weekly sell signal will incur raising the probabilities for a trip back down to March lows.

On the other hand, month end window dressing could kick in lending to more neutrality.

In other words, it's best not to make any bold predictions and take a wait and see approach here. As of yesterday's close, probabilities favor more downside. We'll see today if the market agrees.

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What is the Power Signal?

Outlook:

With volume shrinking as the SPY tags the 50-day average, it's time to start putting on short positions again.

The Path Of Least Resistance...

The SPY continued to struggle with its 50-day average yesterday.

The low volume rise into resistance can reasonably be interpreted as short covering, not actual buying. Now that the price has stalled at the falling 50-day average shorts have been reloading their positions.

Without a new catalyst it is reasonable to look for a resolution to the downside and perhaps a retest of this month's lows.

Check the XLF. While the SPY hasn't yet rolled over, the XLF has already turned back down carving out yet another lower high.

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It makes zero sense to bet on a bottom in this sector. Let others assume the risk as gamblers try to pick a bottom.

One of the arguments we hear a lot is that the time to buy is when things look the worst. That may be true at some point, but we would then ask, didn't things look like they were at their worst back in 2001? In 2001 bottom catchers took a full 50% haircut before prices actually began to stabilize. And then they weren't vindicated until almost 2004.

Buy when there is blood in the streets is the mantra your stock broker whispers in your ear as he tries to unload inventory that has been collecting dust on the broker's shelves.

Leave bottom picking to those with deep pockets and long time frames.

Outlook:

With volume shrinking as the SPY tags the 50-day average, it's time to start putting on short positions again.

50-Day Average A Stumbling Block Yet Again

Yesterday the SPY struggled at its 50-day average as volume has shrunk 6 out of the past 7 days and the day volume grew occurred on a sell day. Shorting at the 50-day average on shrinking volume is a no brainer.



Just make sure to keep tight stops in case end of the month mark ups take over.

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Outlook:

With volume shrinking as the SPY tags the 50-day average, it's time to start putting on short positions again.

Dude! Where's the Volume?

Price action yesterday was indicative of a continuation of the squeeze that started last week. We have one question though, where's the volume?

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Outlook:

Every short squeeze has the potential to turn into a counter trend rally, but over the past few months short squeezes have generally pried shares loose from the shorts only to reverse hard once again.

Given the lack of volume yesterday, one has to wonder if indeed this is to be the case yet again.

Start looking for short positions again if the SPY can rally two or three more points.

Upside Potential Develops

Last week was a wild roller-coaster-ride of a week but in hindsight it looks like emerging from the dust of all the volatility is a double bottom that has the potential to finally lead to a decent countertrend rally we have been expecting for some time now.

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Outlook:

Until we see prices regain the 50-day average (SPY $135.40) and hold for more than a day, price action should remain suspect. However, probabilities strongly favor a decent rally emerging from the current price base.

*While risk is high, higher prices early this week would actually lower risk as higher levels of support are established. We will need to monitor market breadth as prices move higher for confirmation, but we suspect that a sustainable upside move can develop from the base that began forming last week allowing some of that cash to finally be put to good use on the long side.

Double Bottom, or Precursor to More Downside?

After another huge rate cut the expectation was that shorts would get squeezed again yesterday. Instead massive price failures occurred across the board as early morning strength was heavily sold into.

The question remains, has the SPY carved out a double bottom or was this week's bounce just the precursor to more downside?

The answer is it's not clear. The market is essentially range bound here.

The big news of this week is the selling taking place in the market leaders. Ag, steel, gold, and oil all have faced heavy distribution pressure this week. Moreover, as funds continue to unravel their positions (possibly to meet margin calls in their losers) the downside in these high flying sectors could become fast and furious.

While we are recommending a cash position as a whole today, traders might wish to look for short entry points in the commodities sectors.

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Outlook:

The outlook is unclear. The market is range bound and until something breaks, day-to-day activity is only so much noise. Smart money doesn't bet on the direction of noise; there are no advantages in a random environment.

Rate Cut Stabilizes The Market

The trend turned from sharply down to neutral yesterday following a better outlook on GS and LEH, which was then bolstered by a 75 basis point rate cut.

Short positions should probably be covered.

The big question then, what is it going to take before it makes sense to go long again?

The first step would be a successful move back over the 50-day average at $135.65. Until that happens this move must be considered just as suspiciously as the last two bounces we have had this year.

That said, a handful stocks that have been knocking at the door of their 52-week highs in recent weeks are once again threatening breakouts. While the rest of the market battles out areas of resistance and support, you might consider putting money to work on the long side in the strongest stocks.

We would avoid trying to bet on the weaker stocks at this point. The chances of getting whipsawed out trying to pick a bottom in the banks and home builders is just too high even with recent rate cuts giving them a boost.

Outlook:

Near term capitulation may be put on the back burner with the Fed's continued aggressive posture. If the SPY can overcome its 50-day average, it may have a shot at testing the downtrend in the $142 area.

No Capitulation So Be Careful With The Likely Bounce

The market is giving high odds for a rate cut with the Fed policy statement to be released at 2:15 p.m. today. The market's reaction to the cut is likely to make or break support levels, which the market closed near during yesterday's session.

The SPY has support at $126. The Bear Stearns debacle wasn't able to take down this area yesterday, but that certainly does not mean that the all clear signal has been sounded for the longs.

We seriously doubt that a major low has already been put in. Technicals are a mess and there is no good reason to step in and try to pick a bottom in this market. While a rate cut is likely, it remains to be seen how the market will respond to a cut. The dollar is getting killed and more rate cuts are just going to cause further damage to the currency that is already on life support. It's hard to imagine that a big rate cut will be embraced as a positive at this point.

It seems unlikely that support at $126 will get cut today, so what we want to watch out for is how the market behaves if the SPY returns to the $129-$131 area.

Sentiment has reached levels of extreme bearishness, and the VIX is finally spiking. Thus, it wouldn't be a huge surprise to see the market bounce today allowing fear levels to let off some steam.

A bounce is not a reason to get bullish though. Rather, a bounce here would likely be a chance to reload the short position. We have zero signs of capitulation; either near term or long term so it is our best guess that the SPY has a date with its extreme somewhere in the $122 area once a bounce relieves some of the near term oversold condition.

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Outlook:

The bounce failed when Bear Stearns collapsed Friday. We may be nearing a capitulation event, but it's early to tell.

Setting Up Ugly Unless Fed Steps In Again

The market is poised for a poor open today following Friday's failure of Bear Stearns. With the VIX popping up again, we may see some type of capitulation take place early this week.

Right now it's best to be short or just out of the way. Keep in mind that the Fed is still a factor. If they drop rates again a short covering rally could kick off. With so many variables that could occur here and with such wild intraday volatility, there is no way to make a good call on the market today. Outlook:

The bounce failed when Bear Stearns collapsed Friday. We may be nearing a capitulation event, but it's early to tell.

Two Words: Energy and Metals

Indeed, even after a weak open yesterday, prices held and buyers continued to step in front of bad news keeping alive the idea that the market is basing and gearing up for a move higher.

Energy and metal stocks are just pulling higher out of nice pullback patterns and the group offers a great deal of excellent long opportunities today.

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Outlook:

With yesterday's high volume reversal we may have the start of a double bottom, which puts the 50-week average back into play. Volatility is expected to remain extreme and finding gems in the broader market is going to be more a matter of luck than skill. We suggest avoiding everything but those bullish areas that have continued to find a bid throughout this bear market; commodities, ag, and China.

Outlook Nuetral With a Potentially Bullish Bias

Yesterday the lack of bullish follow through gave the bears a slight win. However, charts are firming up on a weekly basis and this may be the beginning of a base-building process rather than a set up for more downside.

Today we suggest everyone start putting together a list of potential long positions, but keep your powder dry and wait for set ups to gel before jumping headlong into the fray.

Most stocks are trading up off of support levels, so even if prices turn lower today, true breakdowns are unlikely to occur. If we are on the verge of seeing the floor come out from under this market once again there should be time to do research and take only the best risk:reward positions by assessing today or tomorrow's close. There is no good argument that we can see at this time for hurrying back into the market.

Take your time here. Prices are not trending either way and at best you can call this market neutral. Neutrality and overly bearish sentiment seems to favor the bulls at this point.

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Outlook:

With yesterday's high volume reversal we may have the start of a double bottom, which puts the 50-week average back into play. Volatility is expected to remain extreme and finding gems in the broader market is going to be more a matter of luck than skill. We suggest avoiding everything but those bullish areas that have continued to find a bid throughout this bear market; commodities, ag, and China.

Fed Strategy Proves Effective At Pulling The Market Back From The Brink

Yesterday we discussed the lack of liquidity that was forcing institutional traders to sell even into the extremes. Once again the market was at the brink of collapse and the Fed and the Plunge Protection Team reeled it back in using something a bit different from a rate cut and perhaps something that has proven to be more effective; a new loan mechanism that re liquefied the economy with $200 Billion.

Yesterday's late day buying appears to be something more than just short covering. It looked to us like broad scale program buying. This potentially puts in a double bottom at the 200-week average and calls back into play a return to the 50-week average at $141.43.

Outlook:

With yesterday's high volume reversal we may have the start of a double bottom, which puts the 50-week average back into play. Volatility is expected to remain extreme and finding gems in the broader market is going to be more a matter of luck than skill. We suggest avoiding everything but those bullish areas that have continued to find a bid throughout this bear market; commodities, ag, and China.

Liquidity Crisis And Mixed Sentiment = More Ugly

Under normal market conditions we would argue that the market is very oversold, and with sentiment levels turning extremely bearish according to SentimentTrader, that the market is due for a minor relief rally or at a minimum a period of sideways consolidation.

We tend to think that this is just the case.

However, the fly in the ointment may in fact be that this time things are different. Banks are reeling in liquidity by refusing to give out loans and calling in margins. This is forcing the big players, such as The Carlyle Group, to liquidate their positions. This may mean that the goal posts are being moved back and that prices may need to overshoot to the downside rather than regress to the mean, which would be a reasonable expectation under normal conditions.

The bottom line, it looks like the short side still has room to move. At the same time, be careful and keep your stops tight so as to lock in profits should prices decide to regress to the mean as they are apt to do.

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Outlook:

Oversold may beget more oversold unless the market starts to see more liquidity due to a government bail out or Fed action. Meanwhile, watch for a capitulation spike down to occur sometime over the next week or so. A high volume spike to the downside, should it indeed arrive, would be an excellent opportunity to cover your short positions into strength at a handsome profit.

Sentiment:

A word on sentiment here: As noted above, the website SentimentTrader has near term sentiment spiking to the extreme bearish side today. This is a contrarian signal to be careful with short positions. Meanwhile, the VIX still has plenty of room to move before it reaches overly fearful territory indicating that we may be headed for a larger spike to the downside that would give us a capitulation low.

What is most striking to us is more anecdotal. Browsing the Yahoo! Finance Message boards we find that a majority of the writers remain hopefully bullish. In general sentiment readings from the message boards can be categorized as follows: the economy is not going into a recession and the selling is overdone; fear levels are too high so I'm buying the low here looking for a countertrend bounce, and with PE ratios this low stocks are a bargain.

This type of sentiment finding tells us that a lot of traders are holding and hoping. Hold and hope is what happens when the market is in a retreat and the results can be very painful for those traders who are in denial about their losses. Denial tends to lead to acceptance and in the market, acceptance tends to arrive at capitulation, the point where the pain becomes so great that they let go right before the market reverses.

The bottom line here is that as long as the majority is in that hold and hope stage the market has room to move to the downside; perhaps much room.

Slippery Slope Of Hope

The market sold off on Friday and closed the week at new 52-week lows. Intraday lows have not yet been tested on the SPY, but they continue to beckon. With the lack of panic that exists in the market we can only conclude that the market is drifting down a slope of hope here and without a rate cut the 200-week average is unlikely to hold, setting up for a panic low near $123.00-$122.50.

Outlook:

Unless the Fed steps in with another emergency rate cut January lows are likely to be tested. And, considering the aggressiveness of recent selling, January lows may not act as support, but rather a milestone on the way to an extreme target of $123.00-$122.50. A move to this area would be ideal and would set up an excellent buy opportunity for a countertrend rally.

Understand though that this is just one potential scenario. Another scenario that could potentially unfold would be for the SPY to find support at its 200-week average at $129.50 where it would create a higher low.

*Assuming the Fed doesn't come in with another emergency rate cut. If they do, we suggest everyone lock in profits on their shorts immediately. In addition, it is likely too late to open new short positions here. Rather, maintain the short positions taken over the past week but don't get extended by shorting too late. Pullbacks are sure to occur as prices work their way lower.

Friday's Jobs Number: The market sold off after the expected 30,000 new jobs turned out to be a loss of more than 60,000. John Mauldin argues, however, that the real loss may number closer to 2,000,000. Ouch!

Market Poised At The Brink; Again

More important than the SPY here is the fact that the QQQQ is poised to firmly break weekly support. If prices don't rally back today the NASDAQ will have broken down projecting much more selling in coming weeks.

Today's Jobs report is released at 8:30 a.m. before the market opens. The report is not likely to save the market and if it comes in under estimates it could crush stock prices. Which brings us to our warning: If the market sets up for a plunge today look out for another emergency rate cut from the Fed. Rate cuts have been busting short set ups for the near term making it tough to make a profit. If the Fed hacks rates again today we suggest covering your short positions immediately.

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Outlook:

Unless the Fed steps in with another emergency rate cut January lows are likely to be tested. And, considering the aggressiveness of recent selling, January lows may not act as support, but rather a milestone on the way to an extreme target of $123.00-$122.50. A move to this area would be ideal and would set up an excellent buy opportunity for a countertrend rally.

Understand though that this is just one potential scenario. Another scenario that could potentially unfold would be for the SPY to find support at its 200-week average at $129.50 where it would create a higher low.

*Assuming the Fed doesn't come in with another emergency rate cut. If they do, we suggest everyone lock in profits on their shorts immediately. Keep an eye on the news before the market opens. This is especially true if the jobs report comes in below estimates. Such an event could be what triggers the Fed to cut rates. News Source

Tomorrow's Jobs Report is Pivotal

The 5-day average remains in a down slope, so despite the past two positive days the near term trend remains down. The intraday action has continued to be choppy this week, but the market is vulnerable to a sharper drop should it close out the week on a negative note.

Right now the price action appears to be at a stalemate and is likely to remain that way until tomorrow's jobs report is released. If the report shows more job loss then it seems likely the market will sell off. A sell off would firmly break the long term trend on the QQQQ and would provide follow through to last week's SPY sell signal.

If the market doesn't sell off on Friday then prices will likely remain range bound and a run back up to February's highs may be in order.

If you haven't gotten the hint yet, Friday's jobs report is pivotal.

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Outlook:

As noted above what happens next probably depends on the reaction to tomorrow's jobs report.

Despite Bounce, Near Term Trend Remains Down

The late day bounce on rumors may gave bulls a small pick-me-up that may extend into today's session. The big however is the fact that the near term trend remains down, the 5-day average continues to slope lower and as such the path of least resistance remains down.

As we start off today, entry points are tough to find but we certainly wouldn't be buyers in this market. Short positions entered earlier this week should be maintained as the downtrend is very likely to regain its foothold sooner than later.

Outlook:

The rally attempt failed miserably and the bottom of this market is poised to fall out. A retest of January's lows seems likely at this point.

Market Hangs Onto Support; By A Thread

Buyers moved cautiously into the market late in the day yesterday. This may mean we are in for a minor bounce or a few days of stabilization. January's lows beckon though and the weakest link, the NASDAQ, is expected to continue to struggle.

Any upside over the next day or two should be used to add to short positions as the path of least resistance remains lower.

Outlook:

The rally attempt failed miserably and the bottom of this market is poised to fall out. A retest of January's lows seems likely at this point.

Market Set To Get Ugly Unless Fed Disappoints Shorts Once Again

Unless the Fed steps in with another surprise rate cut, this is a market set to get real, real ugly this week. Short side risk has been reduced significantly by last week's failed breakout.

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Outlook:

The rally attempt failed miserably and the bottom of this market is poised to fall out. We doubt the lower B-band can hold and January lows are in jeopardy of failing as well.

*Risk on the short side is low today and it is our recommended position. However, should the Fed plunge protection team steps in once again and lower rates to stop a disaster in the making, short positions will likely fail again. So, keep a close watch on the headlines today. Short, but be ready to cover quickly if the Fed lowers rates in an emergency rate cut.