Nothing to Add Until Fed Acts and the Market Reacts

Until the FOMC policy statement at 2:15 p.m. today, the market is likely to continue to bide its time. At 2:15 we should get some fireworks and by tomorrow we should have a better idea what this market has in mind moving forward.

It's best to stay sidelined or at least manage open positions carefully until after the market's reaction to the Fed is known.

There isn't much more to add until we see the reaction to the Fed.

Market Leaders Gave Buy Signals Friday

One of the best metaphors for trading stocks is the example of an airplane pilot navigating his or her way through conditions of low to zero visibility. Pilots must learn to trust their instrument panel readings during these harrowing times and to ignore their own human instincts. Human instincts are distorted in this environment and following them can have deadly effects. The pilot must make decisions based on what the instruments are telling him not what his gut says.

Trading is just like that.

Currently, the market is facing overhead resistance that looks formidable. A normal gut instinct in this situation then would be to go short or at least avoid long positions.

But what is the instrument panel telling us here?

Interestingly enough, on Friday the instrument panel kicked over into a strong buy signal in those same sectors that have been leading the bullish side of the market for over the past year at least. Agriculture, metal, energy, and rail stocks moved higher out of thrust pullback patterns en masse Friday.

Jesse Livermore once noted that the greatest mistake he made early in his successful trading career was to grow bearish on the entire market after a few major sectors had broken down. Ignoring the fact that bull markets can exist in sectors during broad bear markets, he experienced a great deal of pain trying to go short and/or missing strong moves.

Right now the gut tells us "Heavy resistance is overhead in the S&P! Caution! Caution!" And while it's true that even the leading sectors get hit when the S&P takes a hit, there is something else to keep in mind:

Remember that little move higher between April 14 and April 18? Some very nice gains were accomplished in energy, metal, ag and the rails during that move. A similar market move higher, even if it takes us smack into strong resistance, can be accompanied by some very nice gains in the leading sectors for those traders who are willing to ignore their guts and pay attention to the instrument panel.

Outlook:

Overhead resistance, which we have highlighted lately, continues to loom large. Contradicting this, however, is the fact that stocks that have been leading the market over the past year or more, are breaking out of pullback bases on strong volume.

Does overhead resistance cancel out the buy signals in the market leaders? Only hindsight will answer that question.

Resistance is only an area where prices might turn back, not where they are obliged to turn back. Prices can, and always do, do whatever they want.

As of Friday, near term signals all switched back to buy, overhead resistance be damned.

Prices Likely to Rise Into Month's End; Then What?

Yesterday we noted that the odds were roughly 50/50 for a price turn higher out of the current trading range. After yesterday's session where bulls remained in control for most of the day, the probabilities for a run at higher resistance in the $141-$142 area have now significantly increased.

We had mentioned that shorts were likely a bit early last week when they were expecting the $137 resistance area to hold, given the magnetic-like potential of the falling downtrend.

So, the near term trend, while still a bit sideways, is likely to resume higher as we move into the end of the month when window dressing forces help raise prices.

Bulls continue have a significant problem longer term, however. Volume patterns continue to rise during declines and continue to recede during rises. This latest rise into resistance has been no different as you can see from the weekly SPY volume chart below:

Outlook:

Our recommended position continues to be to short SPY into strength. We recommended earlier this week to open only a partial position with the intent of averaging higher should prices rise into the downtrend resistance area.

Currently the downtrend line rests at $140.80. Under the right conditions, should a panic buying event take off, it is possible that the downtrend will be temporarily breached as prices reach higher to tag the 200-day simple average, currently trading at $142.50.

This area between $140.80-$142.50 continues to offer a high probability shorting opportunity should prices rise into it.

Summary:

Near term, prices are expected to move higher. Longer term (once end of the month window dressing is in the rearview mirror) prices should turn significantly lower. Buyers in the current area are assuming an enormous amount of risk.

Stalemate

On the daily SPY chart below two areas of resistance are highlighted. The lower pink circle represents the area of immediate resistance that the SPY is currently struggling with. The darker red circle above represents the strongest area of resistance represented by the falling long term trend line and the convergence of both the simple 200-day average and the 200-day EMA.

As of yesterday's close, we would argue that there is about a 50/50 chance that prices could roll over from the current area having failed at immediate resistance or that prices could shoot higher and run into the more serious level of resistance.

If prices can somehow break through the immediate level of resistance (remember, there is a 50% chance here that they will) probabilities of a subsequent failure at the stronger area of overhead resistance run somewhere in the 90% range.

In other words, at this time, probabilities of putting on a new trade are not very good. 50/50 is a coin toss or a crap shoot; a gamble. However, if prices can manage to experience a panic buy into major overhead resistance then an incredibly high probability short trade can be had.

One way to handle this stalemate we are currently at is to recognize the fact that major resistance is not far away. So, closing long positions and putting on partial short positions makes some sense here. Then, if prices do happen to shoot higher into strong resistance, the small short positions can be added to as you average into this trade.

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Outlook:

The outlook for this market hasn't changed. Ideally prices will continue slightly higher this week allowing prices to drift into the extremes of the red zone to tag the falling trend line. Last week we noted this line was at $141.50, but given the fact that it is indeed falling, we would look for prices to tag the trend at roughly $140.50-$141.00 if overzealous bulls continue to have their way for another day or two.

*Risk of opening new short positions is now decreased and should prices run up to the $140.50-$141.00, an extremely high probability short can be put on.

Risk of Reversal Rising: In the Red Zone

Volume reduced yesterday as the SPY struggled to hold onto recent gains. Given the fact that it hasn't yet tagged its downtrend line, which is now trading at roughly $140.80, we believe there is still a reasonably good chance that we will see higher prices this week before sellers really step up. There are no guarantees of course, but keep in mind the possibility is there.

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Outlook:

The outlook for this market hasn't changed. Ideally prices will continue slightly higher this week allowing prices to drift into the extremes of the red zone to tag the falling trend line. Last week we noted this line was at $141.50, but given the fact that it is indeed falling, we would look for prices to tag the trend at roughly $140.50-$141.00 if overzealous bulls continue to have their way for another day or two.

*Risk of opening new short positions is now decreased and should prices run up to the $140.50-$141.00, an extremely high probability short can be put on.

Be Wary Of The Bull Trap

On Friday the market gapped above resistance and out of the trading range it traded in over the past three months. Bulls must be feeling good as stocks have begun behaving quite bullishly over the past week.

We would offer, however, that this breakout may not be the strong bullish signal that so many hope it to be, but rather that probabilities strongly favor the case that it is a bull trap instead.

Let's take a look at a few problems that bulls are faced with here:

1. The long term trend is still down.

This is a bear market and a range breakout does not change this fact. Indeed, we have been looking for the market to return to its falling 50-week average since the market rolled over in January. On Friday the market tagged this average, which virtually coincides with the 200-day average, as seen in the daily SPY chart below.



2. Sentiment has turned bullish near term and traders have changed their bearish views on the long term outlook from bearish to neutral.

With fear out of the equation, and outright bullishness erupting, all the while the price is trading in the vulnerable red zone makes this market ideal for contrarians to open up short positions into the enthusiasm.

Outlook:

The outlook for this market hasn't changed. Ideally prices will continue slightly higher this week allowing prices to drift into the extremes of the red zone to tag the falling trend line. Last week we noted this line was at $141.50, but given the fact that it is indeed falling, we would look for prices to tag the trend at roughly $140.50-$141.00 if overzealous bulls continue to have their way for another day or two.

*Risk of opening new short positions is now decreased and should prices run up to the $140.50-$141.00, an extremely high probability short can be put on.

Market Breaks Out, Stay Focused On Commodities

The market has now experienced two strong days of accumulation. This follows the breakout day, which occurred on April 1. Following the April 1 breakout, we noted that the market showed a strong propensity toward higher prices.

Keep in mind the fact that the pullback following occurred on lower volume, which served the purpose of filling the April 1 gap, keeping things orderly.

Now that the buyers are stepping back in, this gives an excellent boost to stocks in the strongest sectors, which we have been involved in accumulating over the past few days.

It is our opinion that risk of failure in much of the stocks that ran up yesterday is high and that only a handful of sectors promise reliable gains moving forward; these sectors include metal, agriculture, and to a smaller degree, energy.

We suspect that those who try and bottom fish this market will get burned, but those who recognize the speculation taking place in the commodities will enjoy a decent run.

Again, discipline is important in this market and discipline demands staying focused on the groups that have been working and avoiding everything else.

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Outlook:

Note that a time correction vs a price correction is the most bearish of the two possible scenarios. Ultimately we are probably looking at support at SPY $126 giving way for even lower prices this year. There is nothing bullish about the long term outlook of this market.

If a gun were placed to our head and we had to pick a price, it would be our best guess/estimate that the SPY will tag $141.50 before it runs into a severe amount of selling pressure once again.

Near Term Bottom? Looks Like It

We didn't get a turnaround Tuesday yesterday, but perhaps we got a bottom Tuesday, which is even better as it gives traders a chance to slide into position for another potential run back to the top of the trading range.

Yesterday's set up still stands. The market looks to us like it is ready to make another attempt at higher prices.

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Outlook:

Note that a time correction vs a price correction is the most bearish of the two possible scenarios. Ultimately we are probably looking at support at SPY $126 giving way for even lower prices this year. There is nothing bullish about the long term outlook of this market.

Turnaround Tuesday, Again?

Monday was mildly negative, which considering the meltdown occurring in another bank stock (WB) can probably be seen as somewhat of a positive.

Today is Tuesday and what we have had a lot of lately are turnaround Tuesdays.

Moreover, take a look at the technical set up in the SPY.



If the market is going to surprise aggressive short sellers, turnaround Tuesday seems as good of day as any to do so.

Outlook:

Note that a time correction vs a price correction is the most bearish of the two possible scenarios. Ultimately we are probably looking at support at SPY $126 giving way for even lower prices this year. There is nothing bullish about the long term outlook of this market.

GE Stiff Arms Bulls

When we began providing an assessment of risk a few months ago one of the premises of the risk assessor is that prices tend to return to the 50-week average during bear market declines.

Note that since we have begun tracking the progress of this bear market decline, the price has not yet been able to mount a rally strong enough to tag the falling 50-week average. Moreover, what has been happening is that the 50-week average has been slowly, but surely moving lower.

What we have here is a time correction rather than a price correction. The market has been range bound since late January. Over the past couple of weeks the market has been acting better, so we had considered the possibility that price would finally correct upward to tag the 50-week average, but with Friday's GE debacle prices failed at support and took a turn down once again.

When one of the largest cap firms in the world reports a strong reduction in projected outlook, the market has to stand up and take notice. It may be able to shrug off GE's warning if this week's earnings reports are stronger than expected, but for now it looks like prices are headed back to the bottom of the range again and that the time correction will continue as it has for the past three months.

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Outlook:

Note that a time correction vs a price correction is the most bearish of the two possible scenarios. Ultimately we are probably looking at support at SPY $126 giving way for even lower prices this year. There is nothing bullish about the long term outlook of this market.

Not Much Is Working Here

Stocks in general have gotten little boost following the breakout, which occurred on April 1. In fact, the only stocks that have shown a degree of reliable buying power have been those stocks in the agriculture and industrial metals sectors. In other words, nothing has changed in the market's character, which has existed since the beginning of the year.

Outlook:

Now that the market is closing in on the red zone of resistance we outlined a couple of days ago, selling into strength continues to be the best course of action. If SPY prices can spike up to the $139-$141 area an excellent shorting opportunity will have presented itself.

Dull Drift Continues

Nothing has significantly changed from yesterday's assessment. The market continues a dull sideways drift that we believe has a better than even chance at resolving itself to the upside.

Entering The Red Zone

When we started providing daily updates to the Risk Assessment Meter a few months ago, we noted that the premise was that risk should be considered high when prices are too far from support to buy and too far from resistance to sell.

Indeed, last week the market broke free from its trading range and broke out to the upside. This caused us to advise taking on a long position, which has thus far proven to be the correct course of action to take.

Keep in mind, however, where the market is at in relation to longer term support and resistance levels. The long position taken last week has thus far done well, but as we will see by examining the long term view of the SPY, any additional strength here should be used as an opportunity to take profit and to start looking for good short positions again.

In the weekly view of the SPY, note that prices are just now entering into the red zone, which we would consider the area where risk of a reversal is high. Likewise, risk for short positions will decrease significantly as prices reach for extremes inside the red zone, which is measured by the area where the falling 50-week average and falling trend line come close to meeting.

An old stock market saw says that you should never short a dull market. Indeed, the market has been dull over the past few days. It's our best guess that the market will surprise shorts who jump in too early and that we will see an additional price spike as we enter earnings season that will take prices up to the 50-week average ($139.70) and potentially up to the falling trend in the $141 area.

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Outlook:

As noted above, we believe that prices have a good chance at spiking higher before they come back down. If indeed this occurs, use the strength to take profit on your long positions and start putting together a potential list of short positions again.

Look! That Pig is Wearing Lipstick!

Despite all the hullabaloo in Congress regarding Bear Stearns yesterday, the market held its gains yet one more day. This can be best interpreted as the market agrees with Tuesday's strong breakout and an argument, we think valid, can be made that it is just biding its time for follow through higher.

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Outlook:

The market turned 180 degrees yesterday and as such, the recommended position flipped to long. Over the past few days we have argued that it was too late to add new short positions and to protect last Friday's lows with stop losses. Indeed, this should have protected everyone from a loss, thus we were accurate in assessing that risk was manageable on the short side.

With the strong reversal that not only took out Friday's highs, but which blew through the 50-day average on strong volume, long side risk is now quite manageable with stops to be kept below Monday's lows.

Bear Stearns: The Pig That Was All Gussied Up to Be Sold To Your Pension Manager

Speaking of Bear Stearns, the argument has been tossed around over the past few days by TheStreet.com's Jim Cramer, among others that a good company was taken down by short traders.

This is bunk. Don't believe those who tell you any different.

These types of arguments might work amongst school children but for the rest of us adults it is clear that banks are in trouble not through some Fed conspiracy to take a monopoly position in the industry and not by a handful of secretive and powerful short traders. The banks are in trouble because they took on massive amounts of risk and hid the risks from their investors by doing what Wall Street has been doing for years, putting lipstick on the pig.

In other words, the official story is Wall Street lying to you. Protect yourself by being skeptical, it is in your best interest.

Here's a nice little presentation on Sub Prime that explains in very simple, yet profound terms exactly what happened and what type of fraud was perpetrated on investors. This is nothing new. If anyone is interested in seeing how Wall Street operates from the inside, read Liar's Poker and learn how banks like Bear have been putting lipstick on pigs like many complicated derivative packages and hawking them off to your pension fund managers for decades now.

Link

Note: The presentation is from a Russian website, but it has both English and Russian translations. It's easy enough to navigate. Just click the funny little set of symbols [Следующая] at the top of each page. In Cyrillic these symbols spell the word "next."

Bernanke's Loose Lips Fail To Sink Market Ships

After a big up day like we saw on turnaround Tuesday this week, it's impressive that prices were able hold the highs yesterday and even to eke out a small gain. This is especially true given the fact that Fed Chair Bernanke and his loose lip policy decided to roil the markets with talk of recession. It's a real head-scratcher why this man would aggressively slash rates every time the market hiccups and then turns around and offers up a reason to sell. Perhaps he should be called schizophrenic Ben instead of Helicopter Ben? But, in the words of Malcolm X, I digress.

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Outlook:

The market turned 180 degrees yesterday and as such, the recommended position flipped to long. Over the past few days we have argued that it was too late to add new short positions and to protect last Friday's lows with stop losses. Indeed, this should have protected everyone from a loss, thus we were accurate in assessing that risk was manageable on the short side.

With the strong reversal that not only took out Friday's highs, but which blew through the 50-day average on strong volume, long side risk is now quite manageable with stops to be kept below Monday's lows.

*$135.00-$135.50 look like important levels for bulls to protect moving forward. If these levels break down, we would likely have to consider this upside move a failure.

Time To Buy Again

Yesterday we posted "The market remains very vulnerable at this point, though there seems to be some sort of a short squeeze brewing. Given deteriorated technical conditions, it's doubtful that a squeeze can take the market far."

We were correct about the fact that a short squeeze was brewing. It remains to be seen whether we were correct that the squeeze can get far.

Indeed, it may be the case that yesterday wasn't merely a short squeeze, but that it represented actual buying. In other words, money that has been sidelined looked to have moved in to the market yesterday, meaning that the price action represented more than just short covering.

The falling 50-day average has now been conquered and probabilities have now increased that we are on the verge of a rally that could offer some excellent profits on the long side.

Just don't forget that we are still in a bear market. It's important to keep taking profits off the table as they come. It's also important to be quick to switch allegiances should it become necessary.

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Outlook:

The market turned 180 degrees yesterday and as such, the recommended position flipped to long. Over the past few days we have argued that it was too late to add new short positions and to protect last Friday's lows with stop losses. Indeed, this should have protected everyone from a loss, thus we were accurate in assessing that risk was manageable on the short side.

With the strong reversal that not only took out Friday's highs, but which blew through the 50-day average on strong volume, long side risk is now quite manageable with stops to be kept below Monday's lows.

Market May Be Stabilizing In Front Of Earnings

The market remains very vulnerable at this point, though there seems to be some sort of a short squeeze brewing. Given deteriorated technical conditions, it's doubtful that a squeeze can take the market far.

Friday's high continues to be an important area for near term traders to watch. If prices move back above that area short positions put on at the falling 50-day average could be jeopardized. This does not mean, however, that it's a good idea to start looking for long positions. Rather, it means that trading opportunities are likely to be hard to find while the market looks to upcoming earnings for its next catalyst.

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Outlook:

The market may be seeking to stabilize near current levels in front of this upcoming round of earnings. As such new shorts or long positions are likely to see muted performance. If you are short, keep your stops over Friday's high and don't add any new positions. On the long side, steel and oil exploration might provide opportunities but in this very technically damaged market, it is prudent to keep most of your cash sidelined waiting for better conditions.