Securities Research Services

Monday, May 05, 2008

A Cash Position Is Recommended Here

Over the past few weeks we have outlined a couple of different scenarios which the market could reasonably be expected to do moving forward. One scenario was that the SPY would get rejected at its falling trend line nullifying the breakout at $137.

When prices turned sharply lower following the Fed rate cut last week, it certainly looked for all intents and purposes to be rolling over at the trend line. On Thursday, however, prices whipsawed higher, catching a lot of traders, including us, wrongly positioned.

On Friday prices shot up to tag the 200-day average in the $142 area. This was the second scenario we have recently discussed, which we thought might play out.

Now the question is, now that the market has tagged the 200-day average, does it roll back over on its way to making lower bear market lows? Does it tease us for a few days, breaking slightly higher, but on decreasing volume? Or, and here is a possibility we haven't considered yet, does it make a run against all odds back up to the $146-$147 area on its way to attempt a test at last year's highs?

At this point, all is possible and nothing is probable. We are at one of those junctures that the market likes to set up every so often where it is just not showing its hand. In other words, probabilities are very poor for making new bets here.

What we are sure about is that if prices are bound and determined to run higher here, there will be time to reenter the strongest stocks for a ride higher. And, if prices are bound and determined to fail near here, there will be time to enter once this failure has confirmed.

Confirmation is key to putting the probabilities in your favor here. We need to see either a price failure or we need to see stocks move up higher out of their bases on good volume before putting money to work in this market again.

Summary: Confirmation of a failure means prices sell off on increased volume from the current area. Confirmation of a breakout means we see prices move higher as volume increases. Anything less than these two situations means the market is still teasing and not showing her full hand.


The outlook here can't be known until the market confirms one way or the other. Risk is high and we would think that the market is apt to roll over somewhere near here with prices facing major resistance and with traders bullish again, but anything can and often does happen in the market, so we recommend keeping your money sidelined until the risk:reward situation improves with a confirmation.

Rising prices on bad breadth and increasing bullish sentiment is not a recipe for sustainability.

1 comment:

Anonymous said...

And it's election year. Yet another ingredient to an already wild and wicked brew.