Temporary Floor In Place/Commodities Still Hot

The bulls were able to hang on after Monday's thrashing. A near term floor may in fact be in place here. Once again however the tech sector is lagging the blue chips. The Dow and S&P are trading at multi year highs and threatening a break higher while the Nasdaq and semi conductor indices are trading at support. Relying primarily on Japanese candlestick analysis, tech has support and should turn up from here. We have a feeling however that it will be pulled along by the strength of the Dow and S&P rather than move up on its own volition. Nevertheless, the long term prospects of the market don't appear to be in danger of breaking down just yet and we may in fact have a nice trading bottom in place. If the Nasdaq rallies weakly, it may set up a good short scenario, but let's not try and project too much here as the market is always full of surprises. A lot of people are looking for the metals sector to break down letting the money roll back into tech. We think that just the fact that so many are looking for this scenario to take place means that it will not. The market does a great job fooling the largest number of people; it always has and it always will. Some of the silver companies took a hit yesterday but this had more to do with nationalization threats from the country of Bolivia than it did on actual supply and demand for silver. In fact, the metal itself has a new ETF that lets those without commodities accounts to buy silver directly. Note that this ETF (ticker SLV) traded up yesterday as the mining companies lost footing. It may be that a lot of investors are rolling their money out of the companies, which in many cases are not fundamentally sound, and into the metal itself. Meanwhile gold, the metal, and gold mining companies kept right on climbing yesterday. The ETF (ticker GLD) is probably getting pretty close to a trading top, but a number of mining companies are still in the process of higher base building and we can find very few divergences that might indicate the miners are ready to break down. That other commodity that has everyone gnashing their teeth when they head to the pumps, oil, likewise continues to move higher. We believe that $70 will now act as the floor and that there is no end in sight for the climb in this sector. Pundits may be right, we may be on the verge of a rotation out of commodities and into tech but until we see it actually happen it all amounts to just so much wishful thinking.

Time to Get Rid of the Bad Blood

Yesterday the market left those who have been paying attention a not so subtle message. Recall last Thursday when the Fed Chairman's remarks sent market indices soaring off of support on high volume. You may also recall the fact that a majority of stocks did not participate in that ghost rally. Now, juxtapose Thursday's market reaction to yesterday's counter reaction, also spawned by remarks from a Fed Board member. When the market dropped back yesterday nearly everything participated. Many traders grumbled about the Fed making comments to the media, complaining that the Fed should be more careful with their words. We would point out however that the market was likely looking for an excuse to dump. As we all know stocks trading at multi year highs have recently been trading like they are stuck in the mud. We have argued that this is distribution slowly taking place. Yesterday confirmed for us that we were right; low breadth of participation on Thursday's rally, high breadth of participation on Monday's late day dump. Now we need to keep a close watch on the trend lines. As we pointed out a week ago, the weekly market trends were in tact and stocks were trading at support. Yesterday the QQQQ and Russell 2000 both closed right at their trends. The S&P and Dow are still trading a few points above their trends, but the Dow has very likely put in a top. Do we short? Not yet. As most everyone knows, picking a top in a bull market is risky business. You can be right in general, but not right specifically and if you don't have very deep pockets to ride out the bounces shorting tops can be very painful. The better risk-reward scenario is shorting the failed throwback rally, which often occurs after a trend break. Here's a good example: Note that after the blue up sloping trend broke, the price rallied back up to tag the underbelly of the uptrend. The price struggled at this level for two days and then gave way. As you can see, shorting the throwback is a much higher probability trade than shorting the breakdown. Should we be worried about a market decline here? Only if you are sitting on profits in your long term portfolio. In that instance you should be taking measures to protect those profits with trailing stops. As traders we should embrace these potential developments. With stocks losing momentum into their multi year highs, the number of trading opportunities that actually follow through and work for significant gains have been shrinking dramatically. A good washout is what the market needs to help reset new opportunities. Like Clemenza noted in the movie The Godfather: "This thing's gotta happen every five years or so, ten years, helps to get rid of the bad blood."

Energy and Metals Still Strong

If you merely focus on the index charts from a weekly perspective, we are right at support and ready to run higher. This is especially true on the S&P 500 and Dow. The tech sector however, while also at support, is showing signs of slowing momentum. We believe that this sector may once again lag the blue chips. Likewise, the small cap, Russell 2000 index is vulnerable for a correction. At this time it looks like institutional money is making way for a safe haven in the high liquidity blue chip stocks and it is avoiding high beta small caps and tech, but not necessarily selling these two sectors. Many commentators are looking for a rotation out of the energy and metal stocks as they believe commodities are overdone and likely topping. The truth is that the only true bull markets we are seeing right now are in energy and metals and trying to pick a top in a bull market is a recipe for pain. Market commentators will eventually be right in their calls for a rotation back into stocks from commodity-driven profits, but we believe that it is too early to make that call. We are seeing a great deal of strength in these two sectors at this time.

Indices Look Strong but Stocks are not Confirming

Yesterday we mentioned the fact that Wednesday's market felt a lot worse than it looked. This is because while the major indices were holding up, breadth was poor and stocks in general were just behaving badly. Yesterday morning we felt the brunt of this behavior as support levels were hammered and many many traders were whipsawed out of their trades. After the Fed Chair gave his speech, the indices rallied broadly and stocks that had shaken people out came back up, but most on low volume. Not the indices though. They rallied hard on very heavy volume as program trading kicked in at the prospect that interest rate hikes are history; at least for now. After a rally like we experienced in the indices we would expect to find a broad selection of strength and buy set ups. In fact the opposite is true. Today's scans showed that most stocks did not participate in yesterday's high volume index rally. Does this mean that smart money is gunning only a few index stocks to create a picture of strength when in reality there is none? It sure looks that way to us. We are now at the point of the month where we should see funds putting some money to work and that should keep a floor under the market and perhaps could improve the underlying technical situation. As of right now though, this market looks sick to us and caution flags are being raised. We wouldn't short this market yet, but definitely be careful here. Use your stops and don't buy aggressively. Don't get suckered into the idea that the market will rally now that interest rate hikes are done (or likely done). It may indeed rally, but let it show you proof. Don't buy in anticipation because right now the underlying story of the stocks just does not read very well.

Hung Over From a Demoralizing Day

Yesterday's market didn't look as bad as it felt. The Dow was retesting highs and the other indices were bouncing around their support levels. A lot of stocks we are watching however just drifted on a general lack of conviction. In fact, a lot of stocks were really struggling with support. Market leaders like BRCM just gave way to selling pressure and everyone's nerves are pretty much on edge here. We are now rolling into the end of the month with very little direction. Scans today didn't pick up anything that is really worth considering seriously as the lack of follow through in this market makes it clear that stock set ups are more of a gamble than a science. We expect to see buyers step in over the next few days, but we are agnostic about today. Unless everyone got a good rest last night and put their bull caps back on, buying window or not, today may just give us more of the same dreadful struggle that characterized Wednesday's trading. Let's hope our supports hold until buyers dare to show their faces again.

Semis See Signs of Life

The Dow may be ready to implode here but we are seeing a nice rotation into the tech sector taking place. Intel, which looked ready to take another leg down is being pulled up by a strengthening semiconductor sector. This is exactly the kind of strength the Nasdaq needs to see if it is going to make a strong rally.

Waiting Out the Weakness

As everyone who has been with us for a while knows, one of our rules is "Don't trade every day." Despite Jim Cramer's claim that there is always a bull market somewhere, some days just don't make for very good trading. Friday we experienced some weakness on what we believe can be attributed to expiration. Yesterday we did not get a strong recovery from that weakness and stocks again moved back into the choppy mode that has been so frustrating of late. Today we struggled with scans. Set ups that looked promising a day or two ago now look a bit limp. Generally when this happens we will see more weakness before strength returns. At a minimum we would expect to see today start out weak. A late day recovery would be promising, but we may see this slow drift downward continue into Wednesday. Trying to buy this weakness will only lead to more frustration as support levels will likely be pushed against or even temporarily broken. Late in the week however we should start to see buyers push the market higher as end of month buying kicks in. Traditionally this period starts around the second to last trading day of the month and lasts into the third trading day of the new month. Today is a good day to sit on recent gains and wait for set ups to firm up a bit.

Let's Cut Through the Noise to Find the Trend

Note: We apologize for the delay in providing this report. The blog site would not let us publish yesterday, likely because of server maintenance. Information here is still relevant. There are a lot of forces that move the market and depending on how you wish to interpret (or even mine) the data, you can build a bullish or bearish case that sounds very convincing and appears very sound. Our personal position is that with oil over $70, the commodities market in general on a tear, and the bond yield curve threatening to signal a recession, this rally doesn't seem to have much gas in it. We may ultimately be right and the correction we are looking for will very likely come at some point. But what do the charts say? At this time the index charts say that stocks are discounting all of our worries. Again, this may change, but you have to trade the tape that is right in front of you, not the tape that you anticipate. The tape right in front of us remains bullish. Let's take a closer look at the weekly index charts to get a clear picture of the real market direction. The weekly view is a very good tool for stripping away the noise and revealing the true direction. Starting with the Nasdaq 100 (represented here by the QQQQ): On Friday the QQQQ dumped most of last week's gains as oil rallied hard in the afternoon. Is the QQQQ going to now crash? Well, the weekly chart says that unless the price will close below $41.25 anyone who calls for a reversal in trend should be treated as Chicken Little. The sky is not falling here. With the weekly close at $42 we now have a weekly doji right at support. With the uptrend in tact, this is bullish.

Moving on to the S&P 500 (represented here by the SPY): Last week the SPY bounced off the trend, which started in 2003 and closed the week at its highest level since January of 2001. We can find no reliable signs of distribution here. In fact, our calculations reveal continuing accumulation. This is not bearish folks. We don't know how the market is going to respond to the worries we mention above over coming weeks, but technically the S&P is set to launch much higher.

Now let's look at the semiconductor sector (represented here by the SMH): The tech sector is going to be a lead weight around the neck of the market if the semiconductors can't find a bid. The SMH, as you can see below, is primed and ready to rally off of support. Unlike the S&P, there are signs of distribution in the sector, but this does not appear to be a threat to a projected rally. Unless the SMH closes below $36 any remarks that the bears have taken control of the market should be ignored.

Bottom line: Despite where you think the market is going or where you think that it should go, those who wish to make money need to react to what the market is doing right now. Right now the weekly charts are bullish so we stay long. This does not mean that we can let our guards down and stop using good money management. Indeed now is the time to exercise even more disciplined money management practices. Take profits off the table by selling at least partial share sizes into strength. Selling into strength frees you up to buy the dips and gives you the freedom to look at your positions much more objectively than those who hold and hope. This is an important lesson that takes pros years to learn. Save yourselves the time and heartache by learning today what takes others a lifetime.

It's a Rally Until it Isn't

We want to clarify our position on the market today. Recently we have made some bearish remarks regarding the longer term outlook of the market. We need to qualify these remarks. We have a thesis that the market is nearing levels where smart money will start to distribute shares to retail. If we are right this process could take several weeks before a real top is put in place. Right or wrong, our thesis about what is going to occur long term should have no bearing on how we play the current market. It is very important to play the market that is right in front of you. As hungry bears learned on Tuesday this week, it never pays to pick a top in a bull market. Bears lost money trying and ironically they actually helped feed the rally when they were forced to cover their shorts. A rally is a rally until it isn't. Yesterday some heavy distribution took place in the gold and silver markets yesterday. A top is probably not in place in gold, but it may be in silver. At a minimum we should see both groups pull back to their trend lines and a short may be had by those nimble enough to find a good entry in this wildly volatile group.

Still Rising, but Long Term Trouble May be Ahead

The rally continues and some very nice set ups are emerging. We believe that there is still money to be had short term. However, and it's a big however, we have to be prepared for reality to kick in next week when options expiration is out of the way, the bond market's continued weakness wears, and high energy prices refuse to pull back. We believe that this rally is the opportunity for long term players to sell and that we may be setting up for the first serious correction since early 2004. If the bulls can use strong tech earnings to push the QQQQ past $43, we may see a tradable rise into the $44 and even $45 area. Considering the great set ups we are now finding in our scans, such a scenario is a real possibility. Traders can make good money on the long side in this situation. As we mentioned yesterday, play what is in front of you, but don't get so caught up in the enthusiasm that you forget to take profits along the way. There are still some good opportunities to enter at support, but we would be very careful about chasing breakout stocks here. Next week we will get a better feel for how this immediate term rally is going to hold up. Right now we just want everyone to keep in mind that this rally, whether it takes us to fresh new highs or poops out here, is very likely the rally that smart money will use to do some real distribution.

Can Bull's Now Capitalize on Momentum?

Yesterday the stars aligned for the bulls. On Monday bears, for whatever masochistic reason, tried to sell the market early and bet on a breakdown. As we outlined in yesterday's report, a selling opportunity is coming, but it will be the rallies that create selling opportunities, not breakdowns. Betting on breakdowns near market tops is a fool's game. Monday's sell day merely took market indices back near support levels and the OEX crowd, one of the best contrarian groups, became overly bearish, buying two put options for every call option. Tuesday, bulls recognizing a free gift when it is handed to them, bought the market open and strength endured right up to the FOMC (Fed) meeting minutes release. Bears likely thought they had the opportunity to sell the news but bulls were handed another gift; the Fed made their strongest statement yet that interest rate hikes are nearly finished. The key phrase issued yesterday makes it clear that rate hikes are about to become history (at least for the time being: "Most members thought that the end of the tightening process was likely to be near, and some expressed concerns about the dangers of tightening too much, given the lags in the effects of policy." Today bulls face another challenge; can they manage a follow through? If recent patterns are repeated then the answer is only a qualified "maybe." Yesterday may or may not have finally convinced bears that an uptrend is still in tact. If they are convinced, they will cover their shorts and contribute to the rally by becoming buyers. Bulls also have to contend with continued oil prices, which could be heading toward the unthinkable $80-$90 range (remember when $70 was still unthinkable?). The main thing to do here is just play what is in front of us and be ready to react when the situation changes. Right now bulls have some momentum starting, we are getting some good set ups and stocks are still ignoring high oil prices. Over think this situation too much and you might miss out on some nice gains.

Shorts Once Again Jumping the Gun

Short positions by those who prematurely bet on a breakdown are likely to add fuel for a snap back rebound. We believe that this market is going to provide a shorting opportunity very soon, but it will be shortable once it reaches back near recent highs. Shorting breakdowns is usually a recipe for failure and we believe that will be the case here. The put:call ratio is back in overly bearish territory so support should be in place very close to current prices.

One Last Rally Likely in the Cards

Major indices have support at their current levels, but the uptrend started in October of 2005 is severely weakened. We expect support to hold at this point and we should see one last rally take place. It is likely that this rally will give long term holders a chance to exit their positions and should give traders a great shorting opportunity. We don't expect the market to reverse course harshly, but the uptrend has come a long ways without a correction. It is nearly due, perhaps as early as next month, for a 10%-15% correction. In fact, this toppy market has been tough on traders due to overhead distribution. Rallies have been getting stuck in the mud of selling above. Even so, we are more than likely heading into a trader's market where it will be long term holders that are most frustrated. Due to rising interest rates and global economic worries due to rising commodity prices and continued geopolitical problems in the Middle East, we could easily move into a trading range market that will make for some very nice trader's reversals, but that won't make a lot of long term progress.

Base Building Continues

Stocks continue to build a base at current levels and it is very likely that bears have put in a floor for us. Yes, this is a strange statement but the fact is that when either bulls or bears become overly exuberant or one emotion (fear or greed) begins to dominate the market prices are very likely to reverse from the near term direction it had been heading. In this case that means we should have a floor from which stocks will now begin to lift off from. Yesterday OEX traders bought twice as many puts as calls putting this sector in clearly overly bearish territory. Bonds pulled back, but we stated yesterday they might. This is now base building and not a slow bleed. Stocks may continue to chop around in front of the long weekend but we believe a tradable bottom is now in place. Note: The market will be closed tomorrow for the holiday weekend so we wish everyone a safe and happy holiday. Our schedule will be back to normal on Monday.

Carving Out a Bottom

The bond market, which has kept the stock market under pressure over recent days looks to finally be ready to provide stocks with much needed relief. Near term there may be some more backing and filling, but the bleeding has stopped and base building is underway in that market. Meanwhile, the Nasdaq has been the baby that has gotten thrown out with the bathwater over the last three days. Nasty pullbacks such as the one just experienced generally culminate with an unloading of the best positions right before the turn. Note the Nasdaq 100 ETF, the QQQQ:

For weeks this index struggled with the $42 resistance area. After breaking above on decent volume and basing the price sold back down to the $42 area, now support. Theoretically this area should lend support but we have to wait and see how the market handles this today to be sure. Volume was heavy on the pullback so there is no guarantee that support will hold, meaning we will be looking for a return to trend support at $41.50 before we get a buyable bounce. The Dow is in similar shape as money continues to flow out of the small cap Russell 2000 stocks into blue chips. Yesterday's bleeding stopped right at the Dow's 50-day average and right at it's uptrend line. The S&P on the other hand didn't fare so well yesterday. Recent breakout support failed to hold indicating that the breakout (which we have been calling into suspicion over the past few weeks due to its low volume) has failed. Unless a miracle occurs we would expect the SPY to pull back to the $127-$128 area before finding support. If the QQQQ can find support and the SPY can tread water we could see the divergence between these two indices start to even out a little, which would bring indices back to their norms.

Bottom line: If you are in the mood to short this market after three days of onslaught, you are too late. A lot of short positions were opened after Friday's sell off and negative breadth has hammered virtually everything out there. Action over the past few days has been very disheartening for longs but we are either at support or very close to finding solid support. Those short positions put on could potentially add fuel to the fire on a strong rebound if the bond market does indeed provide a relief rally over the next day or two. If you are long and crossing your fingers for support to hold the best thing that you can do here is continue to cross your fingers and hold and/or considering averaging in at these lower prices. Averaging down is not normally the best policy, but considering the fact that we are much closer to a bounce than to more real decline it makes some sense under the circumstances. We would avoid metals stocks at this juncture. They have gone a long way very quickly and could correct deeply. Corrections in this sector are still buying opportunities, but right now the sector is risky.

Upward Drift Should Resume Soon

Yesterday provided just what we would like to see after a panic sell off day like last Friday; a very light volume day that lacked follow through qualities. Bonds have yet to give any relief to stock prices but remain oversold and a relief rally should be in the works shortly. Stock prices want to drift higher from current levels and bears are surely frustrated that they couldn't get sellers to show up on Monday. Look for prices to slip a bit lower before finding support, but don't get overly aggressive on the short side. . We have a number of positions we are watching that have been pulling back to support. We don't want to be overly anticipatory here however so are waiting for the bleeding to stop before picking anything up. As stated, today may see a bit more weakness, but we expect that we are fairly close to a snap back reversal. Today is a good day to wait for better prices.

Bonds Sold Friday, but are now Really Oversold

On Friday we quoted Bob Carver regarding the bond market and its potential reaction to the employment report as follows: "If the bond market has taken his prediction to heart and the numbers turn out to be weaker than they expect, we could finally get that countertrend bond rally we've been looking for. And, that would certainly help the stock market rally as well. On the other hand, a very strong Employment Report could forestall such a rebound in bonds. At the present time, bonds are extremely oversold, so it will be quite instructive to watch the reaction of bonds to the report. " On Friday bond yields initially retreated as media called the employment numbers a "Cinderella Report" where numbers were not too hot, not too cold, but just the right mix to get the Fed to lay off future rate hikes. Bond traders took this initial enthusiasm as a chance to short though and rates soared causing a strong intraday reversal in the stock and bond markets alike. Note Bob's commentary: "…interest rates, which had appeared immune to Fed rate hikes up until the last few months, are soaring in a "bull market". When rates soar, bond prices drop and that causes the relative yield advantage of stocks over bonds to narrow. It also increases the cost of doing business and that reduces earnings. Thus, the result is that when interest rates trend higher, an extra "drag" on stock prices is introduced. When the drag becomes too large, selloffs result. Friday was one of those occasions. Bonds initially rallied on the Employment Report, but short sellers hammered that market, sending interest rates soaring and stocks came tumbling after, just as we warned you would happen. " Bonds, which were oversold on Friday before the further sell off are now very oversold however and we are even closer to that relief rally predicted, which should give stocks room to continue the uptrend shortly. Look for an initial follow through lower today, which could then easily reverse as more bears are trapped as they once again miscalculated the top in this market. Trying to pick and short a market top is a lot like the old story about the boy who cried wolf. Eventually the wolf is going to arrive and eat the sheep but there will be a lot of false warnings that occur before that happens.

Bonds to Make or Break the Market

The indices actually look quite healthy on their weekly charts. There will certainly be some backing and filling along the way, but the immediate trend is up and the dogs are running. We don't need to mention that breadth figures are still poor and that this run might be heading up on fumes because a rally is a rally is a rally and profit can be made only by trading with the crowd when the market is rallying. If the QQQQ can make it over $43 we see no reason why it couldn't run to $45 over the next four or five weeks; especially now that the semi conductors are coming along. "One of the issues that is now giving the market some relief, where it has been under pressure over recent months is the bond market. Today the market could get a real boost from the bond market depending on how bonds respond to the employment report to be released before the open today. Bob Carver explains this better than we can: A data challenge will come Friday morning in the form of the March Employment Report. While the headline numbers are purely fictional in terms of new jobs, unemployment rate, etc., the market will lap them up and trade on them (as they say in computer circles, "Garbage In, Garbage Out"). According to the current Treasury Secretary, John Snow, we should be looking forward to a strong Employment Report (his basis for such a prediction is uncertain -- most observers suggest his role is more of a cheerleader). If the bond market has taken his prediction to heart and the numbers turn out to be weaker than they expect, we could finally get that countertrend bond rally we've been looking for. And, that would certainly help the stock market rally as well." On the other hand, a very strong Employment Report could forestall such a rebound in bonds. At the present time, bonds are extremely oversold, so it will be quite instructive to watch the reaction of bonds to the report. If the report shows a strong economy and bonds don't sell off and turn around and rally, it indicates at least a short term trend change in the bond market to the upside. And, that would help light the fire under the stock market. Often it's better to simply wait until the news comes and gauge the reaction of the market to the news before taking a position. We've seen the bond market rally in the face of extremely bad news before (to the bond market, a strong economy is very bad news indeed).

Chips Finally Confirm the Rally

We were wondering if it was going to happen at all, but the weekly buy signal the semiconductors gave finally proved itself to be legitimate. As early as Wednesday morning the SOX index looked like a great short as it traded in a bear flag. Shorts were disappointed as the index, along with the SMH, exploded higher. This at least answers one question about this bull move. Sentiment is getting overly bullish, so look for a pullback at a minimum near current levels. This rally does look tradable and the longer term concerns we have been expressing shouldn't get in the way of making money in the short run.

Trade this Market, but don't Buy and Hold Here

The QQQQ has completely negated the head and shoulders top pattern with yesterday's follow through above $42. The only problem we have here is the lack of confirmation by the semi conductors, which still lag near their lows. Moreover, Intel looks like the second shoe is nearly ready to drop as it rolls over into the abyss off of its falling 20-day average. Since INTC is generally the leader for the chip sector, a gap down could have the potential to break support on the SMH (semiconductor holders ETF). We expect this market uptrend to continue, but there are serious signs of weakness here that make us think that large institutional money is using the rallies to sell. Institutional distribution can take place over weeks and even months but just be aware that sector divergences, such as the one mentioned here today, declining breadth on down days, and poor choppy trading in general show that we are getting closer and closer to a correction. On that note, we should once again mention that we would embrace a correction. It will clear out the extra risk in the market and reset the stage with better set ups all around. Likewise this market needs a good dose of increased volatility to reintroduce fear and greed. Complacency over the past months has made pulling money out of the market tougher and tougher. We can manage a correction as it is not likely to blindside us. It will blindside players who have gotten complacent, but that is the nature of the market.

Market Not Ready to Break Down

The first quarter of this year represented a strong showing by the S&P 500; one of the strongest quarters in some time. You could have fooled us. This market has not been an easy market to navigate. Every up day seems to have been followed with a distribution day, especially over the last few weeks. The trend is still up but we have to wonder if the trend is being used by smart money to unload their positions. Case in point: the SPY broke out above overhead resistance during the middle of March. At the time we remarked that the breakout was not to be trusted due to the lack of volume. Now over the last few days every attempt to rally out of this breakout has been shot down mid day leaving a series of selling tails on the daily candlesticks. Each mid day rejection and poor close represents a day when sellers used the rally attempt to unload their positions. This weekend we highlighted the fact that the chip sectors was trading at support and providing a weekly buy signal. We may yet see a rotation back into tech that is validated by a strong move in the chips. As of today however we just racked up more evidence that something is not quite right below the surface of this market. INTC sure isn’t helping the situation in the semis either. We don’t want anyone to panic at this stage as this situation we are describing is still playing itself out and the final outcome is not carved in stone. It remains a good idea to tread lightly in this market and stay hedged in the commodities sectors, which are acting much better at this stage than the general market is. Despite the weak close yesterday we believe that those who aggressively shorted yesterday’s decline might be in for the same type of frustration that longs experienced after buying yesterday’s open. From what we can decipher from scans, yesterday’s late reversal was just more market noise and not necessarily the final nail in the coffin that is going to lead to a waterfall type slide that bears are hoping for. More likely we will continue to experience more choppy trading this week that is going to frustrate all but the most patient of participants. Ultimately this action is going to lead to a larger correction. We just don’t believe we are there quite yet.

Despite a Feeling of Weakness, the Charts Say Buy!

From a daily perspective Friday’s weak close left much to be desired. The semiconductors especially look weak at this juncture. Panning out to a weekly view however the picture changes and a more bullish perspective starts to emerge. Note the fact that the SMH, though performing poorly on Friday, merely closed out the week with a doji at long term support. Indicators (not shown) reveal a strong buy signal on the MACD histogram and improving money flow into the sector. As weak as this market has “felt” lately there can be no clearer point where a market demands to be bought. Think about this in terms of an airplane pilot who is flying through heavy fog. His senses may tell him that he is listing or that he needs to adjust up or down but under the circumstances he must ignore his senses and fly according to what his instrument panel is telling him. In other words, his senses are unreliable and he must not follow his instincts but rather his training. Likewise, instinctually the market is telling us that we must sell but the charts are saying buy, buy, buy. A QQQQ failure at $42 and an SMH breach below $35.75 would negate the buy signals here, but we must buy here and react to a market breakdown if and when and only when such a breakdown occurs. "Ours is not to reason why, ours is but to do and die" -Alfred, Lord Tennyson's Charge of the Light Brigade.

Significant Strength in Gold and Oil

An inverted yeild curve on long term bond rates signals a recession down the road. As we mentioned the other day, it is likely that the Fed is engineering just such a recession in order to put a cap on rising commodities prices as well as let some air out of the US real estate bubble. A recession is likely a year or so off however and this week the yeild curve on bond rates moved up to test the downtrend line. A break above this line will give a boost to the stock market. A rejection will likewise cause the market to sell off somewhat significantly here. As we move into the end of the month of March the market is either betting on a yeild breakout or the monthly mark ups are masking the market's true intent. Likely we are seeing a bit of both play out here meaning that the going in the broader market could remain rocky over the next week or two. Meanwhile, significant opportunities are cropping up in the commodities markets as well as in some areas of tech.

Market Reacts to Fed

The Fed implied a continued hawkish position on inflation and in particular inflation in the energy sector. In order to do this they will have to seriously slow down the US and even world economies. The message the market reacted to yesterday was that the Fed is engineering a recession. This led to a second high volume distribution day in as many weeks. The long term trends established from last fall are still in tact and given that we are moving into the end of the month buying window we would expect that today will see a reversal from yesterday's downturn. This keeps us with our pattern of one day up, one day down trading that has frustrated so many over the past weeks. Major market trends have been sustaining some technical damage of late though and we believe it is just a matter of time before we see a more serious correction. Energy stocks are once again seeing signs of life and could be mounting another leg higher soon. It will be interesting to see how gold stocks respond to a stronger dollar; if the trend in the dollar continues the gold sector could be a short here. Many small cap stocks look like they could make another run. It is probable that some short term trades can be had on the long side with small caps, but profit protection is an absolute must in this market environment. The good news is we are starting to see an improvement in volatility levels, which should lead to more promising set ups on both the long and short sides of the fence.

Chips Continue to Experience Weakness

The semiconductor stocks, which had been showing nice support off their long term trend as late as last week, showed more weakness yesterday. The SMH reversed and rolled over after attempting to regain its 200-day average. If a rotation into tech is going to have any chance of working out, chips are going to have to start behaving a lot better here. At this time the market just feels very weak and breadth figures are very poor on market rallies and good on market sell offs. This indicates continued distribution and there is a good chance that support levels established by the multi month uptrends started last October are in jeopardy of failure. Don't expect the Fed to provide much help this week. They are very unlikely to provide the market relief by projecting when rate hikes will finally end. In fact, they are likely going to do what they always do; overshoot thier target. We are once again seeing metals and oil showing strength while not much is working in the broader market.

Week Ends Mixed

The week ended very, very mixed. If you have been following along you know that distribution continues to take place as the market attempts to climb higher, especially in the Nasdaq. At the same time the Dow continues to threaten a breakout to new highs and a rotation back into the semiconductors appears to be a real possibility. The fact that the Dow is showing strength is forbidding for longs since it implies that smart money is shoring up their defenses by moving into the safer, more heavily traded blue chips. The reasoning is that if the market does shake lower it is much easier to move a lot of money out of large float, heavily traded blue chip positions. Meanwhile support in the chip sector is puzzling when compared to poor action in broader tech. The Nasdaq 100 continues to trade in a nasty head and shoulders pattern and the Tuesday's attempt to nullify the pattern was met with a barrage of selling that led to an ugly intraday reversal. Even so, the following day bulls stepped back in and defended support at the bottom of the right shoulder. 1660 is the bottom of the range and a break below would surely take the wind out of the bull's sails. Likewise, a strong move over 1700 would indeed nullify the bearish pattern and keep the long term trend in tact. With the chips perking up here and given the fact that next week we should experience the traditional end of month buying there is a good chance that bulls will be able to nullify the pattern. Supports are thus far holding, but nevertheless, this is a market that just doesn't feel very strong. We have witnessed a great deal of subtle distribution as stocks continue to get chopped when they trade at the upper end of their ranges. The Dow continues to reveal a flight to safety (realize that institutional money makes up the vast amount of trading volume in the market and it can take weeks for them to set up their positions). Tops in markets are very difficult to predict and prices can continue much higher than it seems logical sometimes. Nevertheless this is a time to tread carefully and a time to either set up short hedges along side your long positions or a time to build up cash positions that allow you to take advantage of the market's next move whatever it may be. Low volatility choppiness that we have been experiencing for the better part of this year is going to lead to high volume and a large move of some sort. Either money that we can't see right now is going to come off the sidelines and bust through this heavy level of resistance the market is now faced with; or, the market will continue to drift precariously higher on light volume leading to a very dangerous situation; or the market will heavily roll over from current levels. Have no doubt though that something big is afoot. Note: Due to a heavy travel schedule this weekend we will not be putting out a report on Monday. We will be back to our normal schedule on Tuesday.

We May See a Bounce, But How Strong?w

Buyers have been stepping in at support and nibbling away at the dips. The market does appear to be gearing up for some more upside. What has been troubling lately though is the fact that every time a stock or an index appears to be making some headway profit takers come in and chop the legs out from under the move. Many commentators are blaming program trading for this type of behavior. If so, this would be indicative of smart money taking money off the table into the rallies, or subtle distribution. There are small pockets of opportunity out there, but this is really just not a good time to be getting agressive.

Bulls Battle Back, but Have Their Work Cut Out

Bulls took a counterpunch yesterday and defended the territory they had to defend. This is an interesting development but we stand by yesterday's analysis. Overhead resistance after the high volume reversal day is going to be formidible. Likewise, money continues to roll into the Dow and the S&P bounced on light volume. These are not good developments if you are firmly planted in the bull camp. On the other hand, tech showed some life yesterday and there is a very good chance we will see the semiconductors make a move. The SMH is bouncing firmly off the all important $35.50 level. The level to watch over the next few weeks is $37. If it can regain this level it may mean that the correction we are looking for may come more in the form of a rotation back into tech rather than a broad reversal of all major sectors.

Bears Snatch Defeat From Jaws of Victory

We have stated rather firmly over the past few days our distrust of the recent S&P breakout. Breadth was our first clue since a decreasing number of stocks participated in the breakout. In addition, the glaring fact that tech did not participate as the QQQQ lagged back at support, provided plenty of reason to be distrustful of any stock rallies from the current level. Finally, volume never confirmed. Now as you can see the breakout is in serious jeopardy of failure as the SPY rolled over on heavy volume yesterday. Now let's take a look at the Nasdaq 100. The QQQQ has been ranging between $40.50 and $42.00 for six weeks now. Yesterday a weak attempt to take out $42.00 was strongly rejected and the index reversed on heavy volume. Also note the uptrend line, now at $41.00 is in serious jeopardy of failure. It is pretty clear that we have an intermediate top in this market and it is fairly clear that we are gearing up for a correction. Keep in mind that there is no reason to panic here. The sky isn't falling and the end of civilization as we know it is not in the cards. A correction can play out in many forms and we have plenty of warning here to prepare our portfolios to handle one should it come. Our course of action is also pretty clear and at the time of this writing we can see one of two scenarios playing out: 1. Yesterday's distribution day will find some relief and prices will once again bounce weakly. If we get such a bounce it should be used as a shorting opportunity. 2. MSFT's after hours announcement will quell any relief rally and the indices will break down over the next day or two. Under this scenario it will be necessary to short weakness. Today we wait to see which scenario plays out.

Is the Cup Half Empty or Half Full?

Depending on how you want to look at it the market is either running on empty here or gearing up for a big rally. We've been exposed to both theories recently and they both have some merrit, depending on what you focus on. We are agnostic about the market at this time and we think a lot of people are in our boat. Certainly the recent breakouts on the S&P and Dow are not to be trusted, but does that mean we come crashing back to earth dramatically or do prices continue to drift higher because sellers are more frustrated than buyers? We don't know. What we do know is that this market is a mine field and navigation continues to be difficult just as it was most of the year last year and just as it has been most of this year. Along with a lot of other participants we would like to see a strong move get underway, whether it be up or down, just to get some exploitable emotion back in this market.

Bulls in Control, But...

If you have been following along you will notice that we have become increasingly concerned with market action lately. We had mentioned last week that we would like to add some short hedges. Our reasoning on this issue has to do with decreasing breadth as the market has moved higher. We frankly don't trust this move. Nevertheless, momentum has been picking up on the upside and while we believe that this latest bullish market move is on shaky ground and not to be trusted shorts are likely going to get burned unless they have deep pockets. There will be a time that this market needs to be shorted, but it is not quite here yet. In fact we could be moving toward a blow off type move, which will suck in a lot of retail money before a real correction ensues. There is no reason to be afraid of this market and money can be made on the long side. We just want everyone to keep in mind that the foundational structure that this move is building on is not sound and we want everyone to be prepared to switch sides of the tape to the short side when it does become necessary to do so.

Option's Expiration Skews Analysis

Any analysis we can offer in addition to what was provided yesterday will be tainted with the fact that options expire today. QQQQ contract writers are very likely going to get the price down to $41, the number representing maximum pain. Technically such a move is meaningless. It means that the price will remain in the trading range it has been in for the better part of the past six weeks. $40.50 still represents the bottom and $42 represents the top so unless one of these prices are breached we remain in a range and must think about the market in ranging terms, not trending terms.

Option's Expiration Skews Analysis

Any analysis we can offer in addition to what was provided yesterday will be tainted with the fact that options expire today. QQQQ contract writers are very likely going to get the price down to $41, the number representing maximum pain. Technically such a move is meaningless. It means that the price will remain in the trading range it has been in for the better part of the past six weeks. $40.50 still represents the bottom and $42 represents the top so unless one of these prices are breached we remain in a range and must think about the market in ranging terms, not trending terms.

Market Shapping up Ugly

It could be options games that is causing the tech weakness here, but there are some real reasons why the bearish case is looking more and more valid. Not the least of which is the fact that the old dinosaur the Dow broke out, which indicates that smart money is running for the safety of the big caps. Add to that the severely lagging tech sector and an inverted yeild curve and caution shows up as the most prudent course of action to take in this market. We have been sidelined over the past week as scans have turned up very thin even as indices were showing strength. Tonight we are going to be scouring for short hedges.

Near Term Bullish Breakout

Yesterday the market surprised a lot of people as the S&P 500 broke out to multi year highs and the Nasdaq bounced firmly off support. This is a pattern we have been watching develop for some time on the weekly charts. This is why we have hesitated to sell short when daily charts were at their ugliest. It looks like this move to the upside is the real deal and should continue for at least the next few weeks. We should be able to pull some decent gains out of this move. That said, caution still needs to be exercized here. We need to watch for breadth as the market moves higher. Bears are making the argument that the market is in the process of creating a topping pattern and they cite an inverted yeild curve as the primary reason. We believe that this move is tradable, but it is also a good idea to be critical of the move being ready to switch alegences to the short side if sentiment becomes overly bullish.

We Repeat, Stay Defensive

As mentioned yesterday, the market continues to waver at a point of indecision. There is no real trend here, though the QQQQ sits solidly on support for now. There are threats to QQQQ support, namely the semiconductors, which remain weak. The second shoe may be ready to drop on INTC so agressive trading here is precisely what we want to avoid.

Market at Support, but Stay Defensive

The QQQQ closed where it needed to on Friday and with a high volume spinning top reversal signal. 40.50 is the key price to watch and if selling pressure, which looked to have let up on Friday continues next week the going is going to get awfully tough. Due to the fact that scans do not confirm the strong reversal signal on this index we are not willing to buy agressively here. At this time the market is between a rock and a hard place. It is too late to short as a near term bounce is almost a given. At the same time, until we see money come off the sidelines going long is likely going to lead to more frustration similar to that experienced over the last week.

Blog Update

We have experienced a virus in our system that has caused problems for our analyst. The blog schedule will resume with regular updates next week. Thank you for understanding.

Once Again, Trading Range Continues

There isn't really much we can add to recent comments after yesterday's session. The market continues to trade in a range and no matter how ugly yesterday looked and felt, key support levels remained in tact just as key resistance levels have remained in tact on upside attacks. If the QQQQ closes below 40.50 there might possibly be something to be concerned about. We believe however that the follow through day the bears are licking their chops over is not going to arrive and they will find themselves frustrated along with the rest of market participants of late.

Trading Range Continues

Scans after Thursday's session look a lot like they did after Tuesday. We don't see stocks breaking down, but a lot of stocks are bumping up against resistance. Unless the market can break above the levels we pointed out in the after market report, stocks are likely going to roll back over and go back to the bottom of the trading range. We continue to look at this trading range as consolidation and base-building.

Long Term View is Sound

The market reversed in a fairly ugly fashion on Friday. Normally this would be a strong warning signal but we are under the impression that the reversal was more about end of the week games and not about distribution. There is a strong probability that the reversal was merely program traders manipulating the index prices by working a few high profile index components. Scans just did not back up the weakness that is reflected in the indices. Moreover, if you pan back to the weekly view, index charts look rosy. Take a look at what has occurred over the past four weeks with the QQQQ (NASDAQ 100). Four dojis printed above its 20-week average. The past month has been frustratingly boring and lots of theories have been flowing as retail traders debate on the direction of the market. Shorts have been burned and longs have been frustrated by stocks that don't move. From the weekly view however, this action has been indicative of base formation. Indicators, volume, and price patterns all favor an upside breakout in the not too distant future.

Two Important Levels to Watch

The QQQQ needs to break above $42 before longs can breathe easier. The SPY needs to close over 129.50. Until these two levels are overcome the market should be considered range bound. On the plus side, overhead resistance has been under attack and market breadth has perked up considerably from early week trading.

Bulls Regain Thier Position of Power

Yesterday when the indices sold off we expected to find a very bearish picture when going through scans. Instead what we saw were virtually no strong short set ups and a lot of stocks trading in neutral territory. Contrast these findings with our scans after Wednesday's session. Wednesday the market traded very strongly, reversing technical damage incurred by Tuesday's bear attack. Only this time the scans revealed a strong amount of participation in the move. We found a great deal of stocks setting up very nicely for a bullish move. This divergence should clue us in that the market is gearing up for another move higher. This is verified by the fact that money flow figures have been diverging against negative price patterns over the past few days.

A Battle Rages

Before running through our scans we were of the opinion that it would be necessary to put on a short hedge or two. After getting a clearer view of the internal character of the market that is better seen when viewing individual stock charts we have determined that there is no clear direction in this market despite the seemingly strong reversal on Tuesday. Stocks are not set up to run at this point but that does not mean that they are set to break down. We saw very few reliable short or long set ups and considering the fact that the broader market is so mixed, we can be fairly confident that set ups that do look promising are in fact unreliable. Bears controlled the day today. They have not gained control of the market yet. There is one near certainty that we can uncover at this point: those who try and enter the fray as both sides battle for control are going to come away with losses. This is not an either/or situation. This is a lose/lose situation until one or the other side gains control.

A Defensive Posture is Important Here

We saw the market moving up today but volume left much to be desired. The reversals on the S&P 500 and Dow are a warning sign as are low volume levels and continued poor breadth. We expect the rest of this week to remain fairly positive but we would like to be very careful here and take precautionary measures like putting on some short hedges. We don't know what the market is going to do next so pragmatism is demanded here.

Bulls Have Their Work Cut Out, but Remain In Control

Breadth and volume were poor yesterday, which means we need to exercise caution. There are however some positives that could keep the market afloat for a while longer. Weekly charts on the NASDAQ continue to show strong buy signals and the prices, though choppy this week, have refused to break down through supports. Another positive is the fact that money is starting to flow out of the Dow. Recall that the bearish case was built on the fact that institutional money was parking in the Dow out of fear that a top was forming. With money moving back out of this dinosaur it indicates that fears are subsiding and that money has an opportunity to flow out of the blue chips and commodities (which continue to correct hard) into the broader market. The last positive for the market here is found in our scans. Scans today revealed a mixed picture. A number of stocks are showing strong inflows of money while another group of stocks that have been underperforming are showing strong signs of being oversold. Market tops are not marked by large numbers of stocks in oversold conditions. The bottom line here is that there is indecision here, but the bulls have the power to pull the market higher. Bears have a weak case and are losing strength, but the bulls have to capitalize. The correction in the commodities sector could influence the fed to tone down its hawkish comments, which could give the market a real boost from current levels.

Market Bouncing on Poor Breadth and Volume

The market is bouncing into the end of the month here, but we would look for more volatility today. Breadth is very poor and momentum has all but died out. We may get a stronger rally next week but right now long positions are really struggling to make decent gains. Bears are convinced we are at the top. We wouldn't go so far as to make that prediction at this point. We do however want to exercise caution and proceed with care until breadth and momentum improve. The energy sector is correcting, which could lend to a sector rotation into tech. Right now money is moving fairly aggressively out of energy, but has yet to move aggressively into tech. As such we would focus on shorting energy here. We do not recommend opening new long positions until the picture clears up a little.

Bears Growl, But We Expect a Push Higher

Blue chip stocks continued to hold near their highs yesterday as tech continued to experience pressure. The slow drift of stocks here can be much more frustrating than a quick downside move since it make support levels bend but doesn't clearly break them. This activity has caused options traders to heavily buy puts into the dips in the tech sector. Logically this makes no sense since they are betting on a breakdown before they have confirmation. Options traders are typically not logical traders though, but rather emotional traders. The actions of this group make for a very strong contrarian buy signal. This is confirmed by the fact that weekly charts are showing strong buy signals even as daily charts are experiencing weakness. The weekly view is always more accurate. We are looking for the tech sector to make a good run as we head into the end of February, which should last into early March. We don't know what will happen after this run. Some are getting quite bearish here, but we plan to just play what is in front of us and not let convictions override reason.

Dow Breaks Higher

Blue chips are outperforming tech here, which is causing some to start discussing a market top. We are dubious of this claim at this point and will need to see stronger evidence than strong performances in large cap stocks to make us get long term bearish. The NASDAQ has a weekly buy signal and there is a good chance we will see tech make a strong move to catch up over the next few weeks. Right now we fail to see any distribution activity that marks a market top. As we stated, the market will make a monkey out of the greatest number of people and this is a good opportunity for it to make a strong run and fool the majority. On Friday we mentioned that the SPY was poised for a weekly breakout. In fact the SPY is poised for a weekly breakout, but the report contained a mistake. It was actually the Dow ETF DIA that was poised to break out last week. The DIA closed over the magic number of $110 and broke out over long term resistance.

Looking for a Potential Strong Close Today

All eyes should be on the S&P 500 today. If it's ETF (SPY) can close above $110, and we will have a weekly breakout. The NASDAQ has lagged, but it is moving nicely off of its trend. Likewise, the semiconductors are gearing up for a strong move off their breakout support level. A strong weekly close today would put the market in a strong technical position to make a very nice run. There has been a lot of doom and gloom about the longer term outlook of the market lately. A lot of it surrounding the unknowns related to the changing of the guard at the Fed. Perhaps the market is going to surprise a lot of people and start trending to new highs. If there is a certainty in the market, it is that the market always surprises the greatest number of people possible.

Blue Chips Breaking Out

The NASDAQ continues to carve out a bottom, the Dow and S&P threaten to make new weekly highs and the semiconductors continue to threaten a new leg up after spending the last 12 weeks consolidating support above breakout levels. At this point we don't have an opinion about how strong the run will be, but the market is certainly behaving very bullishly here. What we do know is that if the blue chips can close above weekly highs this week and the tech sector makes a move out off of support, we are going to have a very nice group of solid trade set ups that offer a good balance between risk and reward. Be patient here because the market is setting up very nicely.

Base Getting Stronger

The big news of the day is the Dow. It is once again threatening the 11,000 level. If the current price level can hold through Friday, there will be a weekly breakout on the Dow chart. The S&P 500 is also trading near recent highs. The running theory is that money is flowing out of small caps into the blue chips. If so, we could be in the last stages of the bull market and could potentially see a larger correction in coming months. For now though, it is best not to try and speculate too much and just play the charts in front of us. Sweeping theories about what the market may or may not do don't make anyone any money, they just cause traders to lose focus and make bad decisions. The QQQQ is building a strong base here and while we could still see choppy trading into Friday, we expect a rally to ensue from this area. As such, dips remain buying opportunities.

Look For a Hard Reversal This Week

Last week we provided two scenarios that could possibly take place as the QQQQ struggled with its downtrend. One scenario looked at the possibility that traders would become overly bearish and the index would stretch down to a very oversold condition setting up a great buying opportunity. The second scenario, which did in fact play out last week, had the QQQQ bouncing to relieve its already oversold condition, filling the gap, and setting up for a new leg down. So here we are. The QQQQ is making its new leg down after filling the gap at $41.50. Do we get bearish here then? No! Instead, the first scenario is now back in play. The index is now getting very oversold and it has long term trend support just below $40. Yesterday the QQQQ closed at $40.49. While this occurred 55k puts were sold and only 22k calls were purchased. In other words, options traders, who have an absolutely horrible record, are betting on a breakdown. We are betting they are not going to get it. Stated another way, dumb money is betting on a bearish case and smart money is accumulating at these levels. This week options expire and bears likely have a target on their backs. We are looking for a sharp bounce higher at some point this week. Scans today reveal that the selling pressure is not yet behind us, but QQQQ dips down to and below $40 are wonderful buying opportunities.

Options Week Kicks Off

The bounce on Friday appears to have been just short covering as profits made last week were locked in before the weekend. There are still a few issues trading independently of the indices, but the broader market does not appear to have solid support yet. Considering the fact that this is options expiration week, expect games to be played. We will be looking for the QQQQ to make another stab lower and suspect that this week will see base forming around the $40 area. During this period dips should be used to accumulate, but we do not recommend buying breakouts. Though we will likely continue to experience some selling pressure this week, it is far too late to short this oversold market.

Sector Rotation Underway

As you can see from the QQQQ chart below, this market has not yet found a floor. Yesterday's sell off after the gap fill projects at least another minor leg down. We suspect that options games played during expiration week next week will shake the QQQQ down below $40 to get the crowd really bearish. This would be a great buying opportunity. Strangely enough, individual stocks don't look nearly as bad as the index charts do. This looks to us much more like sector rotation than it does a serious trend threat. Money coming out of commodities is starting to move to other areas; we think tech. There certainly hasn't been the broad selling pressures that are taking down the whole market here. Yesterday there was some late day program trading that shook a lot of stocks, but most of them recovered quite nicely into the close as bargain hunters snapped them up. Shorts are likely to get burned in the next week or two.

Nearing a Bottom, But What Kind?

We continue to analyze the QQQQ, as it has been the leader on the rally up, and now leads the market down. When it finds support and reverses, it is very likely that the rest of the market will take its lead. Note that the QQQQ has a large open gap up to $41.43 and then a very small open gap up near $43. The large open gap represents a break of the neckline on a head and shoulders pattern and likewise, a break below pivot support. This break indicates that there will be no real support until the price touches down or moves just below $40. One of two things can happen here. Scenario 1: The market will bounce and the QQQQ will move up in a weak thrust to close the open gap above $41. This would be bad for the bulls and we would look to short the bounce under this scenario. Scenario 2: The QQQQ continues to bleed here and refuses to bounce even though it is getting oversold. The price would then stretch down to or just below $40 over the next few days. This would be great for the bulls and would lead to an excellent buying opportunity for what would surely be a strong rally, perhaps back up to or even above January's highs. For now we hope for Scenario 2 to play out, but will prepare for Scenario 1 just in case.

Gearing Up for an Oversold Bounce

The strong trend that started last October has not broken down but over the past few weeks it has grown soft. The market seems a bit confused here and a trading range has emerged. The technical picture has become a bit murky as a result of a hawkish fed statement and some poor earnings reports from key companies this earnings season. At this point it is useless to try and make long term predictions about where the market might go. To do so would just be an exercise in futility. In situations like this we have to follow the acknowledge what is right in front of us and forget about what may or may not happen a few weeks down the road. So what do we have in front of us right now? We have a nasty head and shoulders development on the major indices. Even so, the neckline support on these patterns has held on all but the NASDAQ 100. The breakdown of the NASDAQ 100 has not encouraged follow through and it looks like buyers are once again accumulating in anticipation of an oversold bounce. How strong will the bounce be? We have to wait and see. If the bounce is weak, it will be a good shorting opportunity.

Trend Weak, But Not Yet Finished

Despite the head and shoulders patterns showing up on major indices, we have not yet found signs of major breakdowns occurring, which would indicate that it is safe to short the market here. We are likely to get a bounce early this week. Unless the bounce is unusually strong, it will likely provide an opportunity for us to ease into a few short positions.

In a Trading Range Until We Are Not

Conditions haven't improved much since yesterday. At the same time we are really struggling with the reasoning for going bearish at this stage. There are two reasons for this: 1. The put:call ratio is overly bearish meaning that too many are leaning short here. Since the crowd is only right during the end of trends, this contrarian indicator is fairly reliable here where the market is in a trading range. 2. Indices are trading in head and should patterns, but the neckline on these patterns has not yet been breached. Anticipating breakouts or breakdowns is always a loser's game, so until we have confirmation, we remain agnostic about a breakdown. For now we are still in a trading range. Perhaps the Amazon report issued after hours will be enough to cause selling through support today, but right now support just below yesterday's close is still fairly strong.

Strong Move is Near

We are still concerned about the market rolling over here, confirming the head and shoulders pattern developing on the major indices. However, closer analysis of daily charts and considering the Russell 2000 is once again threatening new highs, a strong case can be made for the bulls here. Put options have been stacking up at these levels, which is a good contrarian indicator that bears are going to get burned as market momentum threatens to iron out overhead resistance. We don't know yet what is going to happen but it is fairly clear that a strong move is close at hand. Likewise, we have a lot of stocks in the market making new highs and very meager numbers of stocks making new lows. Other than a week ago Friday, we don't have evidence of distribution, but we have plenty of accumulation days and yesterday can be included as one.

Index Divergence Problematic

The indices continue to diverge as the Russell 2000 inches higher and the S&P and NASDAQ set up to roll over threatening to finish off the head and shoulders pattern we have been warning about this week. GOOG sold off in the after hours session last evening so we should have some fireworks today. Frankly the market is set up ideally for a short entry. Our only hesitation is due to the fact that we are in a traditionally bullish time of the month where surprises favor the bulls 70 percent of the time. So, rather than get aggressively short here, we recommend playing defensively, keeping tight stops and not opening new positions.

Important Day Today

The market is expected to analyze and digest the outcome of three major issues over the next two days. This afternoon of course the Fed will raise rates and will issue their statement. This will likely be the biggest market mover. Watch for a quick reaction after the report, which is highly likely to get faded. In other words, if the market dumps after the report, buyers are very likely to step in at the opportunity. Likewise, if the market takes off, sellers are very likely to use it as an opportunity to take profits. Ultimately, we are not likely to get much of a trend going today, though the swings could be violent. After the market Bush will give his annual State of the Union address and Google will report. Taken together, these three events are likely to set the tone for the rest of the week and perhaps the next few weeks.

New Round of Earnings Today

Today the market will be required to digest the largest group of earnings reports of this earnings season. Technically the market is set up for a short squeeze but today's reports have the potential to either embolden new bears or crush short positions. It's really up in the air at this point.

Potential Short Squeeze Setting Up

From the year 2004 volatility and breadth levels noticeably declined from prior readings. This makes sense since the market up until November of 2005 was in a fairly tight trading range. During this trading range whenever indices threatened to break out, breadth would decline, good trade set ups were difficult to find, and ultimately the subsequent failed breakout would grind hopeful longs into submission as supports failed to hold. Early this month the major indices broke out above resistance and breadth and volume were strong this time. Last Friday however the breakouts failed on a high volume crash day. What hasn't happened yet though is a decrease in market breadth. Small caps are still performing quite nicely and set ups are looking more and more promising. There is some selling pressure, but sellers are far from being in control of this market. This week we are faced with major indices consolidating last Friday's sell off. Theoretically this consolidation period should favor the shorts as they build their short positions and attack each rally attempt. The problem for the shorts right now is that the indices are not only extremely oversold, but breadth figures are pretty good. This means that there are a whole lot of stocks that are not breaking down with the indices and leadership has been changing. To make matters even more difficult for shorts is the fact that we are moving into the end of the month buying window. The market could break down further here, but the probabilities stacked against this are formidable. Aggressive shorts putting on positions in hope of a support break here are going to be forced to cover when the market bounces to relieve some of the oversold pressure. Likewise, when fund money comes in at the end of the month there is a potential for a very strong bull-inspiring short squeeze.

Was Friday Just a Really Good Headfake?

We are getting some very strange mixed signals this week. Major indices, including the NASDAQ, Dow, and S&P 500 are setting up classic bear flag scenarios. Strength over the past two days has been nothing short of a dead cat bounce. These indices scream to be shorted. At the same time the small cap indices such as Russell 2000 have broken out into new all time highs. Adding to the puzzling information is the fact that scans continue to turn up very bullish set ups. Last week before the market crash we commented that the market was providing the best set ups we had seen in years. After Friday's crash this has not changed. In fact, the few short setups we are finding are failing to follow through. A great example of this is THC, a stock which showed up as an excellent breakdown set up before yesterday's market open. THC did in fact break down yesterday, but only to be scooped up by bottom fishers. Rather than evoking panic, the breakdown triggered a signal for money to come of the sidelines in a bargain hunt. What to make of this? We frankly don't know. The market appears to be setting up for a big move and the perfect short set up on the major indices might just be "too perfect." Either shorts are going to get burned yet again, or the small caps are in for a major correction as the divergence is ironed out. Underlying strength in individual stocks seems to predict that shorts are going to get burned.

Trends and Timeframes

As most of you are aware the stock market has many different trends occurring simultaneously. Which direction the market is trending depends on the time frame you are analyzing. This is always an important distinction to make and it is particularly important to have a big picture view but equally important to know your time frame. After Friday's crash we have to operate under the assumption that the immediate daily trend is down keeping in mind that the weekly trend remains up. This is easier to understand visually, so we are providing a couple of different chart views analyzing the QQQQ. Note that the daily price on the QQQQ found overhead resistance at $43. After pulling back from this level there was some chance that resistance would be broken through on a second attempt. On Friday this attempt failed however and an immediate downtrend was established. There is some support below Friday's low, but it is unreliable as a trading level. The trend is our friend and the short term trend is now down. Current support will likely provide an area where the indices will weakly bounce in a counter trend move. This counter trend move should set up a nice short entry.

For those concerned that a bearish trend means a bearish market, fears of this sort are unfounded at this time. The weekly trend remains up as you can see from the QQQQ's weekly chart. Bears have very likely targeted the open gap at $39.50 and now that they have a trend in their favor they are going to be fairly aggressive about getting their target. A move back to this level would set up a wonderful buying opportunity in the longer term up trend.

The bottom line is that long positions in the general market are going to struggle near term but long term positions should be in good shape for the foreseeable future. Also keep in mind that bull markets in oil and precious metals are still in tact and still strong.

Friday's Crash Catches Us Offguard

The markets opened fairly flat on Friday, then proceeded to collapse as the biggest crash bar since last summer formed on the daily charts. Some are arguing that Friday can be attributed to expiration games by those who had been selling $41 call options on the QQQQ. Since the NASDAQ 100 was hardest hit we will say it is an interesting theory. However, Friday's crash puts a huge monkey wrench into our overall analysis as it calls into question the viability of the breakout, which occurred in November. Subscribers may recall that on October 19 the market experienced a high volume reversal day, which we determined at the time to be a strong confirmation of support. From that point the market has experienced a strong rally. Friday's high volume reversal day must then be taken seriously as it could be marketing a line of overhead resistance. Does this mean that we are heading into a bear market? Not at all. What it means is that unless we see an equally strong reverse of Friday's sell off this week that we will need to be using the oversold bounces to sell into. The immediate trend remains down after Friday and until that trend reverses, long positions are going to struggle. How this all fits into the longer term outlook of the market, we just don't know right now. Today we expect to see at least a partial bounce. This bounce should be played only by the most aggressive market participants, or day traders. The picture is murky after such a poor day on Friday and it is best to take a step back and wait for more information before making any decisions.

Conditions Dramatically Improve

Earlier this year Jim Cramer, who tends to be quite forceful with his opinions and whose opinions tend to change quite often, touted this 2006 market as the strongest market he had seen in six years. We tend to think he is right. This week things looked a little bleak and there were some legitimate reasons to worry that we were on the verge of a repeat of December's pullback. Last year breakout moves were frustratingly sold into and pullbacks like the one that began last week always turned into something worse as the market forced equilibrium. This pullback was not harsh nor was it frustratingly long. During this pullback accumulation indicators continued to diverge bullishly and poor reports from old the market leaders INTC and YHOO were used by smart money as buying opportunities. Yesterday the indices experienced a sharp reversal and the Russell 2000 small cap index forced yet another all time high. Today's scans confirm this move. We saw some of the strongest charts we have seen in quite some time. What we are now watching for is a NASDAQ 100 channel breakout. Recall that the QQQQ (NASDAQ 100) has been in an uptrending channel, but has been bumping against overhead resistance. If the trend is going to make some real strides, it will be necessary for the QQQQ to break out of overhead resistance allowing the trend to accelerate. The attempt to break this resistance that started January 2 was doomed to fail since it had not time to consolidate. Now we had a nice short pullback and volume has been strong creating a very good higher base of support. The set up is now in place for a breakout. Will it do so? Who know? What we do know is the set up doesn't get any better than this. A QQQQ weekly close over $43.30 would confirm an accelerated trend breakout.

The Guessing Game is for Losers

We rolled through today's scans looking through chart after chart finding nothing but a whole lot of neutrality. This makes sense if you think about it. Options expire tomorrow, YHOO and INTL reported yesterday causing a significant gap down so a whole lot of people are afraid to make a decision here. Why buy when it is unclear whether the market will get hammered on today's Apple report? Why sell when the current pullback is getting close to overdone and there are two gaps overhead that still need to be filled? What this leaves are a whole lot of charts that are just not projecting much. This leaves us with two choices: We can either guess what we think the market will do here or we can wait for the market to show us. Nobody survives in the market very long if they make a practice of guessing, so we will wait.

Momentum Gives Way to Uncertainty

Pressure from an overbought market that is up against resistance, higher oil prices, and options expiration week have all come together to put pressure on the indices. Additionally, breadth figures were poor yesterday meaning that market pressures are weighing fairly heavily across the board. Good trading conditions will return soon, but what we are faced with as we move closer to Friday's options expiration is a poor trading environment where money is much more easily lost than gained. It is time to be defensive, to keep your stops, and to take partial profits when they are on the table. Poor trading conditions are not expected to last past options expiration on Friday. In other words, this is most likely a temporary set back in a larger trend.

Momentum Continues

Scans today suggest that the underlying bullish trend continues to have momentum. Pull backs in some areas now appear to be feeding breakouts in other areas. We are finally getting some decent pattern set ups indicating that buyers have been accumulating second tier stocks during the run ups of first tier stocks like Rambus (RMBS). Considering the fact that the NASDAQ has overhead channel resistance just above its current price, we believe that a run higher prior to a pullback would be bullish as it would set up a higher level of support. Nevertheless, with prices as extended as they are, anything could happen here so it is better not to project wants into the market and take a wait-and-see position.

Are Dip Buyers Really This Impatient?

An interesting event occurred right at the close yesterday. In afternoon trading the indices broke down and from 2 p.m. until the close all major indices traded in bear flag patterns. This is a typical pattern that suckers in pullback traders and that generally signals the beginning of a correction. What is unusual this time is the heavy volume after 2p.m., which culminated into a very large buying spike at the close. Could it be that buyers are so eager to get in that they are refusing to wait for a proper pullback? If this does turn out to be the case and yesterday's bear flag fails we could see a mad scramble. Such a scenario would have pullback buyers in the wings battling with the bears who just shorted what they thought was the top. This would create an explosive situation where prices are driven much higher than most market analysts now consider reasonable. What to watch for: If the QQQQ moves (not just quickly dips, but actually moves) below $42.80, then yesterday's bear flag will have succeeded and we will likely see further pulling back from current levels. If not, then today and next week could see some fireworks.

Hoping for Some Consolidation

While the QQQQ broke above its overhead trend channel and the SMH moved to new highs it would be a bit Pollyannaish to expect gains to go into hyperbolic mode without some pullback or consolidation first. In fact, we would prefer to see gains consolidate for a while and perhaps pull back just sharp enough to scare out the new longs. Up trends are great, but when everyone is bullish at the same time the trend can be jeopardized.

Buyers Don't Back Down

Buyers are waiting below soaking up the dips so we could see this rally continue unabated for at least a few more days. Nevertheless, expect quick, frightening pullbacks that shake out weak longs. Looking at the longer term charts, technically there is no reason why we couldn't see a repeat of the type of rally that occurred from the April 2003 breakout, which didn't top off until January 2004. We are already starting to see some of the hyperbolic moves in some of the more high beta stocks that were so prevalent during that rally. Over the past two years traders have been conditioned to sell the breakouts and we have struggled to make 10% gains. Longer term subscribers will remember that during the 2003 it was not uncommon to see stocks make quick 20%, 30%, and even 50% or more gains. We are not trying to put subscribers in an overly exuberant mood where reason is thrown out the window. There are no guarantees that we will see a repeat of 2003 this year. However, we are trying to get everyone to look at the bigger picture and to start thinking less along the lines of "sell the breakout" to "let's exercise a little more patience so that we don't miss the larger moves."

Risk of a Pullback Increasing as Bullishness Grows

The crowd is getting overly bullish here and that makes us a bit nervous. Price could certainly continue to climb from current levels. In fact it is likely. The risk of a quick reversal triggered by profit taking increases with each higher high the market makes here however. We consider a pullback to be a buying opportunity, but keep in mind that bull markets sometimes experience sharp pullbacks that trigger stops and frustrate traders. Our time frames are not long term so a pullback that is too sharp can quickly wipe out profits on the table. For the reasons stated here it is better to stay conservative until the market pulls back and provides better entries.

Semis Lead the Way to a Strong Start for 2006

A couple of months ago we noted that the NASDAQ 100 (QQQQ) and the semiconductors (SMH) were leading the rally that started last October. In late November, early December both of these indices broke above multi year resistance levels and we noted that these breakouts would have a significant impact on trading results for 2006. After breaking out, these two indices along with the broad market spent the month of December moving sideways in consolidation modes. Towards the end of the month when the Santa rally failed to arrive bears were preening and bulls were singing woes as both groups looked for the sky to fall. We remained obstinately bullish during December's pull back for what we believe are good reasons. Friday our reasons for remaining bullish were profoundly confirmed on two important weekly charts (keep in mind that a weekly chart view is much more reliable at determining the longer term direction of a stock or an index than the daily view). Over the past 20 or so years one overlying truth has been that the market cannot sustain a move without the semiconductors. This may not be true forever, but at this time we find that the semiconductor sector remains an important leader. It is very bullish then that the semiconductor sector has taken the lead once again and as of Friday this sector has strongly confirmed November's breakout. After a test of support the SMH bounced back strongly last week and on Friday a breakaway gap over multi year resistance was achieved. Despite what the talking heads might say, despite how poorly the bears paint the economic picture, despite all the negativity you are bound to hear over the coming months, keep in mind that the chart says that smart money has been accumulating and now shorts are starting to realize that they have been wrong. We are now in the early phase of a strong move.

The QQQQ chart is interesting here, for while it also confirms the strong breakout, it is up against its overhead trend channel resistance. One of two things can occur here. Either it can maintain its current slow climb and pull back to support or it can break higher as the trend accelerates. Friday's strength suggests that the trend will accelerate. The strength of the broader market suggests as much as well.

Watching the Semis

The NASDAQ 100 and S&P 500 have both moved up to very significant levels. Both indices are back up near last year's highs, both have been moving up on solid volume, and both have room to continue the run before technicals become overbought. It is important that these indices either break through to new highs or base for a while at these levels. If they get turned back here it would be quite bearish and will make for difficult trading for the next few weeks. In addition to the bullish technicals, the good news is that double tops are rare so let's hope the bulls can keep this rally going for just a while longer. For argument's sake, let's place ourselves in the shoes of the bears here. Perma bears have been trying to catch a top every time the market has rallied over the past couple of years as they look for impending doom to set in. When they have turned out to be wrong their short covering has juiced the rallies allowing the markets to climb a wall of worry. Here we are once again back at last year's highs, an area that constitutes multi year highs. What better place for perma bears to put on new short positions in an attempt to catch the top? Specifically we are once again watching the semiconductor indices. The SMH closed back at last year's highs yesterday. Shorts were likely put on side-by-side against the long bets yesterday. If the SMH can move over $39.15 or simply just close over $39.00 we should see some very explosive action as shorts start getting stopped out and the overwhelming realization that they were wrong once again takes hold. Someday they may catch the top the precedes the big crash, but we are betting that this time will once again be wrong.

Trend Up, but Some Indecision Here

While there are pockets of strength that should now be freed up to trade slightly independent of the major indices, major indices are up against daily resistance levels and it is yet unknown whether we will get a break through to new highs or a re test of support. Our scans don't give us an edge here on the direction the market will take and they essentially confirm indecision. The bottom line is that the major uptrend is alive and well and we expect gains to continue over the next few weeks. At the same time, the immediate trend could either reverse back near Friday's lows or could break to new highs. A move back to Friday's lows should be considered a buying opportunity. A move below Friday's lows would be bearish, but such a move is not expected.

Bulls Take Firm Control

Yesterday's strong move higher was a clear accumulation day and should set up a foundation for a move higher as we start out the 2006 trading year. We wouldn't be surprised of some of yesterday's move is faded today as pros shake the tree a bit more in an attempt to weed out the momentum bulls. Yesterday's move is reminiscent of October 19 where the bulls clearly marked their territory. Keep in mind that the lows were tested a few days later and panicked momentum players were shaken out just before the strong November move. Beware as this could happen again. Have confidence in the fact that bulls have once again marked their territory.

2006 Starts On Better Footing Than 2005

We started the year 2005 on the heels of a strong Santa rally that had the market trading at new highs. The market rewarded exuberant traders with a long bloody slide that lasted until April 2005. For those fearing a similar scenario, fear not as conditions are distinctively different this year. We now embark on 2006 with oversold stocks, which have not only evidenced strong accumulation creating a nice divergence, but also with major indices having merely pulled back toward their multi year breakout levels. Don't underestimate the significance of last November's market breakout. Yes we experienced profit taking into the year's end, but indicators reveal strong signs of accumulation taking place during this bout of profit taking. We won't make any predictions about today as the immediate down trend is still in effect until its not, but we will make the argument that this market is setting itself up for a continuation of November's breakout.

Never Short a Dull Market

Yesterday we mentioned a line in the sand where bulls had to make their stand with the QQQQ. Window dressers didn't show up once again and the QQQQ wasn't able to hold support. We don't wish to be ultra stubborn with our bullish stand here but even though the situation looks dire for the bulls there is something that needs to be considered. Going back to last month recall that window dressers did show up until the first day of December, or the third day into the traditional window. On December 1 the market gapped up and continued to run for several days after discouraged traders denied end of the month buying washed out November 29th and 30th. Consider that the market is very oversold here, that there have been no real distribution days aside from December 8, and the fact that end of the month buyers could potentially be waiting for market sentiment to turn a bit more bearish before they step in. Now if a series of real short set ups start showing up in our scans we will rethink our theory here but right now we think there is still potential for a sharp reversal. We hope that subscribers can see why we have hesitated to put money to work in the market as we wait for the market to make its move. The best immediate term indicator we have at our disposal is the health of our daily scans. All week scans have been telling us that buyers are just not stepping in yet. On the other side of the coin, they have not indicated that distribution has been taking place either. A few smart rules to live by: Don't short a boring market, don't short an oversold market if selling is occurring on light volume, and finally, don't short into the end of the month.

Bulls Have the Setup, Will They Take Advantage?

If you drill down to the 40-day, 2-hour view on the QQQQ an interesting development is revealed. The price pulled back to the 200-period average and bounced early around the 19th/20th of the month. This week the price has once again pulled back to this moving average and yesterday the price bounced once again, this time with strong bullish divergences on most major indicators. There is a line in the sand drawn for the bulls here. The QQQQ must not go below $40.77 or the index will most likely drag back down to $39.50. That said, the set up for the bulls is clear and with end of the month window dressing upon us, odds vastly favor a strong move higher starting today. Such a move higher will produce reliable buy set ups.

Looking for Positive Bias to Continue

Last week ended with a slightly positive bias and with indices still oversold. Buyers need to step up here however or the correction that started in early December could persist into January.

Signals are Mixed

The weak bounce yesterday was uninspiring and leaves much to be desired. It may be that that Santa rally turned out to be just a self fulfilling prophecy and not one that was led by legitimate end of the year factors such as fund mark ups. Making a bearish case it may be that traders sold early strength and we may find that the intermediate downtrend started this week will remain in effect until the QQQQ reaches its lower channel support as outlined in Tuesday's report. The bullish case, which we still believe has some merit, is that the market pulled back to intraday support with bullish divergences showing on various indicators and the late afternoon pullback is just another attempt to shake out weak longs before the real rally begins. Today should be interesting. (Hedging? Yes we are hedging. The signals are mixed here.)

Sellers Exhausted

The QQQQ stopped just above its 50-day average and left a doji yesterday. A doji represents a day of indecision. Considering that there is still a favorable seasonal bias even if the rally that everyone expected didn't arrive (perhaps in fact because everyone expected it) and considering the fact that indices have moved from overbought to very oversold we have to entertain the idea that the market has delivered a near term bottom. Yesterday we indicated that follow through from Monday's breakdown would have to ensue before any reliable short set ups would emerge. Follow through lower did not arrive and though buying opportunities are still thin we should see an upward bias into the end of the year.

Santa Stays Away

Santa may not arrive on Wall Street after all this year. Several important indices in the tech sector broke decisively below lower support levels. The S&P and Dow threaten to follow. Follow through is always important, but we may find that the market is offering some short swing trades this week. Keep in mind that a pull back here does not destroy the longer term outlook for a continuation of the strong bullish move begun in October. Taking a look at the QQQQ you will notice that after the weekly breakout in early November, the price has now been turned back by upper channel resistance. There are two points where the price can now find support, depending on how determined sellers are. Minor support can be found at the pivot point towards the center of the channel, roughly just below yesterday's close. More likely however the price will track back to the $40 area where the major trend is. The latter is a more likely scenario and one which should produce some intermediate shorting plays.

It's a rare thing to not experience the Santa rally, but as everyone should know by now, the market does experience anomalies and it is better to expect the unexpected than to rigidly hold onto your original bias.