Don't Let Fear Keep You On the Sideline

Our expectations for a minor market decline this week appear to have been off base. Buyers showed up and snatched up early weakness yesterday pushing the broader market to fresh highs into the close.

The market is extended here, but good trades often appear in these extended conditions. We have been making money for months now while the talking heads on TV have been warning caution.

Let your stops carry you out of the bull market, not your fear.

Be a Bull, but be Careful

The QQQQ is back at the top of its range. It could theoretically power higher here, but we think the probabilities for a pullback to the bottom of the trading range are higher. The long term trend remains up and we continue to find many good long set ups.

All of this said, we are frankly a bit nervous here. Perhaps that's normal after making good gains on many positions recently. When we look at stocks on the daily charts, we are not seeing any warnings or signs of distribution, but prices are extended when measured against their standard deviation.

One of two things needs to take place when this happens then: Either prices will revert to their mean, or, a large breakout will occur, which will redefine the range of standard deviation. Since the trend is still up, we will cautiously lean toward the latter, but we need to be prepared to switch allegiances should prices decide to regress back to the mean here. In other words, be a bull here, but don't be afraid to turn bearish if necessary.

Probably a Quiet Day Ahead

Today is options expiration and the market is closed on Monday for a holiday so we don't expect much activity in the market today. At a minimum, today is not an optimal day to open new positions. Maintain current positions and enjoy the long weekend. We will evaluate the weekly close on Tuesday.

Bulls Remain in Charge of the Tape

Trading range watch continues. The QQQQ closed at the upper end of its range yesterday. With options expiration tomorrow, we doubt that it will make much more progress here, and expect that it will chop back toward its $44.00 max pain level.

Even so, the market is in great shape for a fresh leg higher. Look for the S&P and Dow to consolidate near current highs and look for the QQQQ to attempt a break out above $45 over the next week or so.

It remains to be seen whether or not a break out will succeed, but so far the probabilities remain in favor of the bull camp.

Nervous Market Needs More Back and Fill

Bernanke testifies before Congress over the next two days and traders are nervous. It is likely that he will provide market moving information as the Fed appears to have hit the sweet spot with their last round of hikes, keeping inflation in check and keeping the economy on solid ground. Even so, the market may be a bit jumpy as it digests the news. Happy Valentine's!

Back at Support

The QQQQ returned to the lower support area in its trading range on Monday. The market has turned very bearish as it considers this meaningless move back down to support. This bearish posture and the fact that the market is at support, projects a move higher as we approach expiration on Friday.

Nevertheless, this trading range activity is essentially meaningless and the price of the QQQQ is likely to fluctuate around $44.00 the rest of the week.

Use dips to accumulate here and don't chase breakouts.

Trading Range, Trading Range, Trading Range...

On Friday stocks bounced off overhead resistance in the trading range. This can be seen clearly by looking at the QQQQ (NASDAQ 100) chart. For three months the QQQQ has bounced between $43.50-$44.70. On Friday the QQQQ briefly tagged $44.72 and then turned south, as should have been expected by anyone who recognizes that this market is range bound.

Note, however, that the QQQQ is approaching its uptrend support, representing the trend which began back in July. Options expire on Friday and it is very likely that the QQQQ will remain range bound until then, allowing options sellers to cash in with full profits as their contracts expire at or near $44.00 maximum pain. Friday is also the day that the QQQQ price should run into the uptrend.



This week, then, is likely to remain fairly uneventful and moves within the trading range should be interpreted only as market noise and nothing more. When the QQQQ runs into the trend, we will then know whether this market is going higher or creating a top. Probabilities favor a move higher, but don't discount the fact that the uptrend might fail to. In other words, plan for the best, but be prepared for the worst so as not to be disappointed if the market doesn't fit nicely into your expectations.

Gold Catches Fire

The broad market continues to work its way slightly higher and tech continues to work out its trading range. We suspect that a sharp one or two day drop may be coming up that will shake out the weak hands and put fear back into the retail traders who are starting to recognize the uptrend.

After options expiration is out of the way, look for tech to start trending higher as it scales a wall of worry.

Meanwhile, everything's golden in gold. Gold is catching a bid and the upcoming move could be a big one.

Broad Market Makes New Highs

The public continues to refuse to recognize that the market is in a strong uptrend. Ever since this trend started in late July the public has been trying to guess at a top and each time the market powers higher they are forced to cover their shorts at higher prices and as such adding more fuel to the bullish fire.

Bears have continued to furiously purchase put options even as the broad market made a new high yesterday. Scans show an underlying degree of buying that could power this market higher for some time to come.

The trend is up and dips are buying opportunities until the trend changes. We certainly would at the very least avoid the temptation to try and call a top in this strong market.

All of that said, don't lose sight of the fact that the market always has surprises up her sleeve. Bet on the upside, but make sure to honor your stops in case something goes wrong.

Time Correction

One word only be used to describe yesterday's session: flat. That word packs a punch though if you consider the fact that the broad market has continued to drift higher over the past few weeks and the tech sector has been correcting sideways.

There are two ways that a market can correct after making gains. It can pull back on profit taking, which is a price correction, or it can trade sideways, which is a time correction. Time corrections are always more bullish than price corrections since they represent the fact that sellers have virtually no power to move the market. The most explosive moves generally follow time corrections.

Add to this the fact that the ne'er do well options traders are once again betting heavily that the market has topped out by furiously buying put options, and you have an explosive situation.

Now put buyers may get a tiny bit of encouragement if the market dips again like it did on January 25 and 26, but such a dip would only be a tease that would make them think they were right, when in reality it would represent only a move back down to major support levels. Unless you are trading for scalping profits, there just doesn't seem to be much profit on the downside in this market; not right now anyway.

Tech May Surprise Shorts

Put buying in the tech sector has been steady over the past week. Likewise, money flow into the tech sector has been occurring even as prices in this sector have been lagging the broader market.

This reveals a situation where dumb money has been selling tech short under the assumption that the lag in this sector is somehow meaningful. At the same time, it shows that smart money has been accumulating the weakness.

The week may get off to a weak start as overbought conditions in some of the stronger areas of the market work out the profit takers. The market remains in an uptrend here though and we expect that dip buyers will continue to step up to the plate. A breakout in the tech sector could spark a strong rally as current shorts are forced to cover.

Keep in mind that the QQQQ is still about a week away from touching down at its long term up trend line. Meaningless games are sure to be played as the market continues its sideways consolidation.

Tech Holds Back Market

The employment report could set off some volatility today, so it's best to take a wait-and-see attitude to the market today as you manage your industrial sector positions. Tech has been like an anchor around the neck of the broad market over the past week and yesterday it once again held back any significant buying.

Industrials all the Way

Yesterday's rally off the Fed minutes release was nice, but it is not a signal to chase the market. Fed rallies usually reverse the next day. Likewise, the market is still in a consolidation range and it will be another week before the QQQQ runs into its long term uptrend. It would be healthier if the market would continue to trade sideways here, so we hope that an unsustainable rally higher from yesterday's gains does not follow.
br> Meanwhile, the industrials have established an excellent base of institutional volume support. We haven't read about this quiet accumulation anywhere so there is a great chance that we are getting in on the ground floor of what is turning out to be a very nice sector move.

Industrials are the Place to be

Volatility has been almost non existent over the last few days as no one is willing to make a bet in front of this week's Fed minutes. Rumors about rate hikes are back, but we believe there is almost no possibility. Bonds, which have been falling have been essentially raising rates little, by little every day for a while now. The Fed is certainly not going to exacerbate the situation.

We are entering the end of the month window and stocks have been holding up well, which is bullish. The IWM continues to trade near highs, but we wouldn't bet on a breakout there just yet.

Meanwhile, money continues to flow into the industrials indicating that we may be on the verge of a reacceleration of capital spending. Growing economies mean growing markets, so the outlook continues to improve here.

Dull Days in Front of Fed

The IWM (Russell 2000) continued to show strength yesterday. However, it closed up against resistance so it may move back to support from here. The rest of the market remains range bound and with the Fed meeting over the next two days, this situation is probably not going to change today.

Scans today turned up a rather innocuous picture where most stocks show that they will continue to drift as the market consolidates. A few stocks popped up on earnings, but most of these moves are not tradable.

In the market there are days where it pays to get aggressive and there are days were it pays to just not do anything. Today is one of those days where it pays to just not do anything. Gamblers need to keep on rolling the dice, but good traders know when it's time to wait for higher probabilities.

Small Caps Finding More Strength

The trading range we highlighted on Friday morning did indeed assert itself and a quick dip below $43.50 on the QQQQ found buyers. Once again, it does us no good to over think the daily moves in this market. It is range bound here and panicking on support tests and getting excited as prices move off support are both irrational emotions that represent a reaction to meaningless data.

Just keep the big picture in mind. The longer term bull trend is in tact and a breakout to the upside is almost a given in coming weeks. Those putting on shorts in hope that the market will break down here are probably due for some serious pain.

We did have a couple of interesting developments last week. While the blue chips and even big cap tech were under pressure late last week, the semiconductor sector, SMH, was actually trading in positive territory. The SMH is of course still range bound, but the fact that sellers are no where to be found, even on weak days, and that buyers continue to buy at support are both positives here.

The other interesting development is the fact that while the broad market indices such as the Dow, S&P 500 and NASDAQ, all have another week or two before they will run into their longer term up trends, the Russell 2000 small caps, represented below by the IWM, has been finding support at its long term uptrend and is projecting an upside breakout this week.

Trading Range Asserts Itself

Thursday's market really gave bulls a scare and has everyone talking about a potential market collapse again. We think that there is no reason to over think this market so much.

Let's put things into perspective.



The QQQQ, as seen above, has been ranging between $43.50 and $44.75 since November 15. It took one dip to its 50-day average in late December and tried to break out in early January, but the trading range held both moves in check and the market returned to its mean.

In other words, this has been a non trending market; a market trading sideways. Understanding this fact, we don't see any reason to interpret Thursday's move as either bullish or bearish as it was more just a reflection of the choppy nature of the current market.

If you look over at the bottom right of the chart, however, you will note that there is an upward sloping trend line. This line represents the up trend which started way back in July. The fact that the QQQQ has been trading in a tight trading range over the past nine weeks is a reasonably bullish development.

Look for the QQQQ to remain in this trading range for a few more weeks. There is some potential for prices to drop slightly below the range here, but that would take the QQQQ back to trend support where it should bounce. A drop to the trend here would be less bullish than a continued sideways move though. A drop to support here would cause some ugly divergences to develop on technical indicators and would call into question the ability to hold the trend. If the market can maintain this range, we should see significantly higher prices in coming months.

Rotation Into Metals

Tech found footing yesterday, but we suspect that this rally is not going to get far. It would be tough to short tech here, but we don't recommend trusting the strength beyond just a few day's trading.

Meanwhile, money that was flowing strongly into tech over the last month now appears to be making its way into the manufacturing and metals sectors. Steel broke out with volume over the past two days and golds are moving up nicely as well.

Wary of the Tech Bounce

Buyers took advantage of shorts who were leaning too hard yesterday. This created a turn around Tuesday, which has been quite common lately.

Even so, tech continues to lag so we will be looking at its bounce for an opportunity to short some of its weaker components. The QQQQ could be carving out a head and shoulders top here, so this is something to think about as prices rally.

In Between a Rock and a Hard Place

Sellers remained heavily in control of the market yesterday. The Semiconductors are at important support levels and the broad tech sector, as measured by the QQQQ has pulled back to its 50-day average. As such, there remains a chance that stocks will hold today. However, if sellers keep on hammering at support levels, we may see prices continue to bleed lower for a week or two.

We had hoped that bulls would have remained optimistic enough to try and rally the market back up again this week. That would have created a nice short set up. The fact that selling has remained relentless so far makes for tough going.

Very aggressive traders have a trade if the short some of the weaker tech stocks here, but in doing so they take on an additional risk of shorting against an already oversold market.

We strongly advise focusing on preserving your trading account by tightening trailing stops and not opening any new trades until better set ups emerge. Long side set ups are in jeopardy of failure here, so it's not a good idea to buy weakness in this market. And, as we already stated, oversold bounces put new shorts in jeopardy as well.

On Tuesday we find ourselves in that middle ground market where risk is very high on both the long and the short sides. When the going gets this tough, the tough may get going, but the smart ones move to the sidelines and wait for better times.

Small Bounce Expected This Week

The QQQQ experienced a breakout failure last week. Nevertheless, prices are likely going to disappoint shorts and refuse to follow through lower; at least for now. Friday saw decent buying support and we would expect to see prices bounce back higher this week.

Many tech stocks saw serious damage though, so we will carefully consider shorting any strength this week instead of getting aggressive on the long side again.

Tech Takes One on the Chin

The week promised to be uneventful and when the market promises something, it oftentimes does just the opposite. The market is an unreliable friend.

Tech took a heavy hit yesterday as the QQQQ sold off on heavy volume causing a failure to occur on its recent much ballyhooed (by us anyway) breakout. We had been complaining over the past two days that good set ups were just not to be found. This should have been enough warning considering the fact that in the past when scans didn't turn up good trades it has been a precursor to poor market performance.

Dip buyers may step in and offer support here and the larger trend remains up. Even so, it pays to be careful here and any further rallies are definitely opportunities to sell and not signals to buy.

Options Week Games Continue

Games were indeed played yesterday as stops on many stocks where gunned in the afternoon, only to see prices recover again late in the day. We count all this activity as market noise in front of tomorrow's options expiration.

What this "market noise" has done, however, is make it very difficult to find a good stock set up. Oil prices look like they may attempt a bounce this week, but that too may just be options expiration activity, which is not going to have a lasting impact into next week. Due to the sharp fall in oil, there has been a fairly heavy short position taken in the sector. Options writers would love nothing more than to see a sharp one or two day climb in the oils that would erode profits on open put contracts.

We are doubtful that oil can mount a meaningful longer term comeback from here, so the probable dips in the breakout transport sector may be buying opportunities.

We await to see if the pullback in tech finds buyers. We suspect it will.

Options Week Keeps a Lid on Market

Options expiration is this Friday and the normal pattern going into expiration Friday is a trading range to kill time premium on options and allow option market makers to buy back cheap options (and allow the worthless ones to expire). Thus, it should be a quiet week in the stock market.

Tech Set Up Interesting Here

The week closed strong last week but now the market, and in particular, the tech sector, is overbought. Of course overbought conditions can remain for quite some time in a strong bull market, so it doesn't necessarily mean we have to pull back here. Even so, take a look at where the QQQQ is at on its weekly chart.

As you can see, it has channel resistance at $46. This channel has repelled the QQQQ three times in the last four years. There are good reasons to believe that this time will be different, but we need to be wary of this $45.50-$46.00 area and give it respect.

As we said, there are some good reasons to think that this time might be different. The bearish case is obvious (resistance and overbought market conditions), so we will focus primarily on the bullish case here.

1. The QQQQ is trading in a "bump-and-run" pattern after it fooled traders on a false breakdown last July. This dip below support is a classic shake out pattern that often occurs before major bull markets begin.
2. The QQQQ seems to be carving out a cup and handle pattern. This is also a technically bullish development.
3. Major QQQQ components are very strong: MSFT broke out above a similar channel a couple of months ago and is now on a tear as institutional money floods in. Likewise, unless you have been on vacation in Siberia, you know that Apple (AAPL) has been breaking out as the market excitedly embraces the iPhone.

Money has been moving out of energy and into tech for over a week now and the movement has been quite dramatic. This is setting up to be the year of the tech. Could it be a fake out? Yes, definitely. We need to be wary of that and until the QQQQ breaks through resistance we need to be extra careful. So far it looks really good for the techies though.

There Remains Money to be Made in this Hot Market

Tech continues to rally as the QQQQ broke outside its upper Bollinger band. The QQQQ has major resistance at $46 and is likely to get there before this rally is over. In the meantime though, the extreme move represented by the move above the upper Bollinger may cause pause in the sector for a few days giving the other indices time to catch up.

At least that is the healthy expectation.

Tech could continue to rally higher, but then stocks would be on much shakier ground and a larger correction may loom. But let's worry about that when and if it becomes an issue. Right now there is still profit to be made from this rally and focusing on a potential future correction will keep you from profiting now when the market is hot.

Small Caps Ready to Join the Tech Rally

Last week we outlined our reasons why the small cap sector was gearing up to lead the market higher after underperforming the blue chips during the entire fall rally. The IWM (Russell 2000 ETF) then proceeded to break down instead of higher seemingly nullifying our prediction.

That was last week. This week the IWM has caused eager shorts a great deal of pain as it has refused to follow through lower. Instead, the breakdown has reversed and can now be considered a failure as can be seen below.

But what happens when a stock or an index rallies back up after a breakdown fails? We need look no further than the current market leader QQQQ to see. Note the failed breakdown in late December in the QQQQ chart below. Now the QQQQ is powering higher and is threatening to break out to multi year highs. Look for a similar development in the IWM to ensue.

What happens if the IWM starts to move? We should start to see some nice fast moves in some of the lower priced stocks. This is something we have yet to see in this rally, but it looks promising.

Sentiment Readings Might Mean this Time is Different

Yesterday's trading was choppy as the market tried to digest the meaning of continuing weak oil and other commodity prices. Falling commodities seem to be projecting an economic slowdown, which is causing some concern before earnings season, which kicks off next week.

Sentiment readings swung into the extraordinarily bullish direction yesterday as an extreme 14-1 QQQQ calls were purchased against puts. As long time readers know, an extreme reading of 2-1 calls to puts is considered overly bullish and tends to proceed a market correction. Readers may also recall, however, that we witnessed similar extraordinary extremes in October right before the market powered higher.

The lesson here is that while overly bullish sentiment is not healthy for continued price highs, an extreme number like yesterday's seems to represent a level of confidence from a group that knows something. So, while we are need to remain cautious here and keep our fingers on the trigger ready to exit if something goes wrong, it looks as if a group of institutional traders is making a similar bullish bet as the one made in October, which paid off handsomely.

S&P 500 Resumes Uptrend

As predicted yesterday, the SPY found support at its 50-day average and turned higher again. This is a bullish development, which should keep stocks trading positive over the rest of the month.

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Tech Sector Points Higher

Rally disbelievers were screaming distribution on Friday as the S&P pulled back, but should we worry? Let's check the facts.

The QQQQ rallied last week and money flow on the index broke out confirming a rotation into this sector. In the past, the broad market has always followed higher a few days after the QQQQ has led the way. This time may be different, but it probably won't be.

Likewise, let's put Friday's S&P pullback into perspective. As you can see below, the SPY is merely pulling down to its rising 50-day average. If it touches down on this average this week, it will be the first time it has done so since it broke above on August 15. This has been a strong trend and strong trends find defense at their 50-day average as the pullback crowd eagerly awaits a high probability buy. Also note that the SPY broke out above its weekly resistance line in November. This line now provides a high degree of support.

Rotation Into Tech Gives Bulls the Edge

This week has been all about rotation. We had to take a conservative approach and stay sidelined most of this week as energy stocks, which were highly profitable for us over the past two months, went into a melt down. Staying mostly sidelined over the past two days has paid off though. While the trading picture was still murky yesterday, it is now clear that money from energy stocks is now being rotated into tech. Bull markets don't generally go very far without tech leading the way. The QQQQ (Nasdaq 100) has been lagging this bull market since spring. But now something interesting is taking place. The QQQQ bounced off its 50-day average this week and yesterday blasted higher on heavy volume. This is a very healthy bull market development.

Watch the Small Caps

After breaking out late last year the Russell 2000 (represented below by IWM) has been trading in a contracting triangle pattern. Contraction after a breakout and improving money flow in the sector project that small caps are gearing up for an important break higher. So far during this rally, blue chips have been the market leaders. If the IWM does indeed break higher here, the baton will be passed along to the small caps, creating new opportunities in some of the faster moving, higher beta stocks.

The new year started off with a wild ride as stocks first made high volume gains on program trading, only to reverse and go negative before closing virtually unchanged. The swings were hard on stop losses, but did virtually nothing to the trend. If indeed we are correct about the small caps, then yesterday's low should be the ultimate near term low and stocks will now be free to continue higher.

Wait and See Mode Today

Friday's trading was non committal, which was to be expected. Not only was the market closed for a very unusual 4-day weekend, but today professional money managers return from their extended vacations. Factoring these two items into the equation is not enough though. Topping off the uncertainties we face today is the fact that we start a fresh new tax season today.

Because of these uncertainties we have neutral charts pretty much across the board. It is important to stay open-minded about the immediate outlook this week. The fact is, we just don't know if the pros are going to come back today in a selling mood or if they are ready to buy. Friday's options reading was overly bearish. Moreover, the first week or two in January is generally positive. As such, we may see buying today, but evidence for either the bullish or bearish case here is pretty subjective.

If you are itchy to dive into the market after the long weekend, try to restrain that itch and take a sideline seat today. Uncertainty is not a good environment to open new trades into. The year is just beginning and there will be plenty of chances to put money to work. For today, wait and see what sets up after the long weekend. If you do, you will have a better chance of putting the probabilities in your favor.

Happy New Year!

The QQQQ has been the dog of the market over the past week, leading the crowds toward more bearish sentiment figures. Contrarian reading of this sentiment, along with the oversold techicals in the uptrend lead us to believe that the crowd, who has been storing money in money market funds is about to put that money back to work at higher prices.

In other words, so many are expecting a bearish start to the new year, that it is likely just the opposite will occur. We wouldn't be surprised if the market continues to struggle a bit near term, but intermediate term technicals are firming up and show that there is a good chance that the market, including the QQQQ may be ready to breakout.

Small Caps Breaking Out or Breaking Down?

Small caps, represented by the IWM (Russell 2000 index), made their way back up to test major overhead resistance yesterday. The long term chart on this index is interesting. Either this group is getting ready to break out to all time highs and keep on going for some time to come, or it is topping here. Why do we say that? Volume has been huge since last spring.



Note the fact that the last time the IWM peaked its head above resistance spring of last year. The breakout failed big time and small caps went into a tail spin. Volume since that time has been overwhelming large so either smart money is accumulating small cap stocks for a big run or they are unloading their shares in expectation of an even bigger failure than last spring's failed breakout. The jury is still out for us.

Momentum Scarce this Holiday Season

Yesterday had a mildly bullish bias as the small caps took over and started moving higher even as the NASDAQ lagged. Overall, however, the strength we were seeing in the market up until a week or two ago has given way to neutrality almost across the board.

Taking a look at the longer term charts we can see a potential scenario shaping up. The QQQQ, as mentioned, lagged yesterday. If you look at the weekly chart it appears to be building a base that could take a few weeks to form. During this base building process, prices could potentially dip down to $42. As long as $42 holds, assuming this scenario is correct, stocks could rally strong mid to late January.

If indeed this is what is taking place, we would expect the S&P and Dow to trade sideways or dip slightly in a grueling base-building process over the next few weeks. As yet, we are not seeing any serious distribution, just a slowing down of momentum that is likely the beginning of a consolidation period.

This week the market should continue to rally, but from what we saw yesterday, the rally may not get far and profit potential is not very strong. This is a stock picker's market right now and just a handful of stocks are showing any real potential.

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Friday's Breakdown Likely to Get Faded

Last week we focused on the trading range that the QQQQ had been trading in. On Friday this range broke down. Does that mean that it is time to go short? Maybe, but probably not. There are a few of reasons why we think that Friday's breakdown will get faded this week.

QQQQ Range: $43.35-$44.75

1. Seasonality: This week between Christmas and New Year is traditionally positive and seasonality factors are particular strong and trustworthy this time of year. This does not mean that this year won't be different, just that the probabilities favor a rally. 2. This is the first time that the QQQQ has pulled back to its 50-day average since the bull market began in August. Pull back buyers defend the 50-day average in bull markets. 3. Oscillators are very oversold at this point. Now understand, oscillating indicators can and do stay oversold for very long periods of time in some markets. However, this usually occurs when the market is trending down. During an uptrend, oversold oscillators are buy signals and at a minimum should not be shorted.

Today: Don't be surprised if the market opens weakly today. In fact, we hope that it does. Weak opens at the beginning of the week typically invite buyers who fade the early weakness causing a strong rally to ensue.

If, however, the market does bounce here, but does not find any follow through buying higher, we will need to reevaluate our bullish posture. This is just an "if" at this point.

Random Trading Offers Chance to Take Off Early Today

The trading range we outlined in yesterday's report remains in effect. Prices closed at the bottom of the range yesterday. Seasonality suggests that prices will drift higher today in front of the holiday. Unfortunately this is about as much useful information as we are able to provide about this market today.

The market is in random walk mode as it ranges within the trading range. Professional money managers who have not yet taken off for the holidays are quite likely to take off today. Volume should be especially low today and price action should be fairly meaningless. This is not an environment to open new trades in.

In fact, why trade at all today? Take off early with the professional money managers. Go home and enjoy your families. Get an early start on that weekend road trip you were planning. Have a wonderful holiday weekend. We plan to. We also wish everyone the best and hope everyone stays safe and has a great holiday.

Rangebound Through the Holidays

Yesterday the market was forced to digest the idea that the government's war on terror – a war that has now lasted longer than WWII – will go on perpetually and will cost trillions of dollars and countless lives. It's a complicated situation and one that will take a while to sift through. For now we find ourselves stuck in a trading range which is likely to last through the holidays.

QQQQ Range: $43.35-$44.75

Thailand Could Have Hurt, but it Didn't

With the market at vaulted prices and traders in a state of controlled anxiety as they seek to find the balance between staying with their trades and not giving back profits, yesterday's scare from Thailand should have been just the news to pull the carpet out from under the market. The fact that buyers used the morning weakness as another buying opportunity was very informative.

This appears to be a market that maintains full rally mode and the uptrend remains in tact and in good shape. There is still a lot of money on the sidelines that can be put to work at higher prices so once again, the trend is your friend and your friend is bullish.

Choppy Market Ahead

For the past three years December has proven to mark a significant market top. So far this December is turning out to follow the pattern. Yesterday blue chip stocks like IBM and GE rallied while the majority of the market was under heavy selling pressure. This is typical topping action.

Money managers, who need to have their money working at the end of the year are parking it in low beta, heavily traded blue chip positions while they are in a mad scramble to unravel their riskier small and mid cap positions.

Selling pressure was felt across the board and should be respected. Nevertheless, bears who sold short yesterday are likely to get burned as market players use the low volume holiday environment to run the stops. That is, new short positions will have stops placed at overhead resistance levels creating a big temptation for hedge funds to run prices back up and collect the stops before they enter their own short positions.

We expect that the market will see a turnaround Tuesday today where yesterday's losses move back into positive territory. This may be a chance to exit long positions and put on shorts of our own. We will need to wait and see how furious the buyers are as they play their hand.

Right now it is absolutely essential to stay patient and not open any new positions. A weak bounce today would be a good opportunity to open some shorts, but as of the time of this writing there are no advantages afforded anyone but the scalpers.

Note to Gold and Bronze members: We plan to issue an update on open long term positions either today or tomorrow. We are waiting for more data before adding to current commentary.

Taking a Cautious Approach Today

On Thursday the market rallied as sentiment had turned overly bearish. Some argue that Thursday's rally was a thrust rally that marks the beginning of the end in the bull market we have been enjoying. Friday's lack of follow through seems to bolster that argument.

The reason that follow through is important here is it helps us determine if Thursday's rally was merely shorts covering after their stops were triggered or if there remains significant buying interest at these levels. There wasn't much buying going on Friday so we need to heed the warning here.

Trading volume is likely to be weak this week as traders start heading for the exits early to go home and enjoy the holidays. In such an environment it is best to wait and gather as much data as possible before making further decisions. That's what we suggest doing today, waiting for more data (i.e., today's trading results) before making any further moves.

Santa Arrives

Sentiment levels skyrocketed into the overly bullish category as the Santa rally arrived in force yesterday. Nevertheless, the gains look to extend themselves into next week as volume levels were solid.

Those doubting this rally will continue to bite their lips as prices continue higher. Even so, this rally should be treated as if it were the end game. It may or may not be, but while good short term trading opportunities are presenting themselves here, a longer term reversal may be developing. Don't be afraid to buy here, but just be aware of the reversal potential and be ready to take profits into continued strength.

Basic Materials Remains the Place to Be

Yesterday dip buyers propped up the market and most sectors closed strong. We noticed a subtle difference, however, between much of the broader market and those stocks in the basic materials sectors. Many of the breakouts we have been watching in the small caps have been coming back as scalpers take their profits and buyers fail to follow through. Many traders are being made to feel like they are trying to climb a greasy pole here. This is what happens when buying interest is waning.

We will probably get a Santa rally over the next few weeks, but the real strength has come from a rotation into the oils and other basic materials (except steel, which suffers from a poor outlook from sector leader NUE). As such, we should see the indices rise into January, but trading is going to be tough for those outside of the basic materials sectors, with just a few exceptions.

The failure of the semiconductors to participate in yesterday's late market strength is telling. Trading tech is sure to cause continued pain and frustration.

Note: We sent a near term recommendation to subscribers today. Please check your email for details.

Update After the Open Today

The market looks vulnerable for a sharp correction. Over the past two days we have seen stocks struggle for traction as they have begun slipping lower. The key area to watch right now is the QQQQ. If this ETF trades below $43.50 it may mean that sellers have gotten the breakdown that can trigger continued sliding.

Nevertheless, the market has yet to digest the Fed meeting minutes released yesterday afternoon. The initial reaction generally is meaningless so today we will see what the market really thinks about yesterday's minutes.

We will be providing another update after the market opens when we can get a handle on what type of sentiment we will see following yesterday's important market moving event. We plan to provide updates on open near term selections between 10:30a.m. and 11:00a.m. today.

Fed Watch Today

The market is once again in Fed-watch mode in front of today's meeting. Meeting minutes will be released at 2:15 p.m. EST. Until this time don't expect much to happen. In fact, trading activity is likely to mirror yesterday's activity. After the meeting we should see some fireworks, which in the final analysis may or may not mean a thing.

The broader market is set up for an upside breakout here, but the potential for a fade (where sellers use the breakout to sell) is strong here. If indeed the broad market breakout does fail it should bolster support in the oil stocks, which have been enjoying a slow rotation as profits earned in the blue chips have been moving into the energy sector.

Tech Weak, but not Broken

After last week's trend break in the QQQQ and then subsequent lower high formation we would expect that the tech sector will continue to be a tough sector to trade. Nevertheless, we will not be looking for this sector to break down here. Microsoft pulled back just above its 50-day average and found huge buying support on Friday. Likewise, the semiconductors, while quite unexciting as a group, have shown good support in the area around Friday's close. It will take some sort of catalyst to break them down.

Oil is coming under a bit of pressure, but most oil sector stocks are consolidating nicely so we expect the pressure to find dip buyers.

Gold prices are likely to come back to support from current levels, but gold stocks seem to be moving contrary to the dollar right now and not the price of gold itself. The dollar has been in a tail spin and its recent weak bounce is likely to be met with more selling. Next month, however, there seems to be potential for the dollar to find support and rally, which means it's probably a good idea to sell into the next round of strength in the mining sector.

Employment Report Should be a Market Mover

We will withhold any predictions today as we await the market's reaction to the pre market release employment report. The numbers in the report have proven to be untrustworthy, but the market tends to take cues from this report nonetheless. We wouldn't be surprised if bears are handed more pain today for once again jumping the gun and shorting too early.

Watch the Lower High

The QQQQ may have made a lower high, which may not seem like a big deal. In trend analysis, however, one of the best tests of the strength of a trend is whether or not it continues to make higher highs. A lower high that appears is like a dead canary in a mine shaft. It's a warning that something isn't quite right. Potentially buyers can power out of this set up and move prices up over November's highs. But if the price rolls over here, look out below.

Commodities, Commodities, Commodities...

The commodities sectors continue to find dip buyers and as oil consolidates near the top of its range, a strong break higher is the potential here. Since the S&P 500 is weighted fairly heavily with some of the larger oil companies such as XOM and COP, stronger oil prices are likely to keep this index afloat longer.

The NASDAQ on the other hand is vulnerable to some sort of correction. We however continue to believe that bulls maintain the upper hand and the trend remains up. The trend break mentioned earlier in the week has resolved itself as dip buyers once again fed a spoonful of pain to the shorts.

Our question is, why short when there are so many great opportunities to go long in the oils and metals? We suppose there is a natural competitive tendency to want to call the top and prove one's self superiority over others by being the smartest one in the herd. The temptation has been a very destructive one for four months now. And, with the trend aging in people's minds, the temptation is probably stronger now than ever.

We've said it before and we will say it again. Tops take time to build and shorting a strong uptrend is a loser's game.

Note: A near term stock selection has been sent to subscribers. Please check your email for details.

Commodities Continue to Heat Up

Yesterday the broader market rallied and oil consolidated. For those not paying attention to the big picture it is easy to get lost and confused as such situations develop. Those paying attention to volume levels, accumulation, investor sentiment, et al, will see that the picture is quite clear here. After the trend break on Friday, the QQQQ rallied on overly bearish sentiment, taking out stops on newly opened short positions. The rally was uninspired though and weak volume and a poor close indicate that yesterday's strength is likely to give way to weakness today. Oil on the other hand, while not exciting to look at, actually performed extraordinarily well. Prices consolidated near weekly highs in both oil and oil-related stocks. By the end of the day minor profit taking turned out to be merrily a shuffling of positions from weak hands to stronger hands. Prices closed near daily highs in this sector and breakouts and trends stayed in tact across the board.

Commodities Continue to Heat Up

Energy Heating Up

As we predicted it might, the QQQQ finally broke its uptrend line during Friday's session. The day must be considered a distribution day due to heavy volume flow. Nevertheless, tops take time to build and we could possibly see another spike higher before any real declines set in. How far the broad market will decline is up for debate, but we have very likely seen as much upside as we are going to see until we first get some form of a correction. When commodities are performing so well, who cares what the broader market is doing though? That is unless you are married to a stock and refuse to shift with the tides as they shift the sand below your positions. Oil prices continue to firm up at their current levels and oil stocks are providing some of the best set ups we have seen in some time. One note to keep in mind related to the energy sector. The sector in general is high beta, which means that reactions to incoming data are magnified several fold. If you keep focused on the bigger energy trend and refuse to pay heed to the day-to-day wild fluctuations that this sector is famous for, there are many opportunities presenting themselves here. On the other hand, if you let the market noise get to you and you narrow your focus too much, then you are likely to get shaken out of a good position right before it makes a strong move higher. When trading this sector it is best to keep stops loose, trading on end-of-day prices rather than paying too much attention to what happens mid day. Note for subscribers: We sent out both long term and short term recommendations today. Please check your email.

Broad Market Trend May be in Trouble

Selling pressure in the broader market, which received some relief on Wednesday, once again returned yesterday. This puts the 4-month QQQQ trend in jeopardy.

On the intraday QQQQ chart above we have drawn out a potential scenario that may unfold if buyers don't return today. Longer term the picture remains bullish, but the immediate picture is starting to look fairly bearish here. Meanwhile, the oils and metals are in great shape. A strong correction on the broader market may ruffle these sectors temporarily, but any dips in the commodities should be considered buying opportunities.

Tuesday was but an Aberration

Tuesday's hard dip, it turns out, was just an aberration in an ongoing strong uptrend. Weak hands were shaken out and new shorts were put on, but the market continues to move forward. Short positions are likely to be covered higher, further driving prices higher from here. Likewise, performance chasing fund managers are likely to run this market higher into the end of the year. We will worry about January's tax selling in January. For now, this market remains hot and oil has taken over as the market leader once again.

Looking for Consolidation

Dip buying was aggressive yesterday, but their remains pressure from European profit takers, which should keep the market in back-and-fill mode over the rest of the week. From the European perspective the market has been in a correction since the dollar started falling heavily last week. The US market in Euros is quite a different picture than it is in dollars. Nevertheless, the discrepancies should even out over the next week as we are seeing good accumulation take place into the dips. The gold and oil sectors remain under heavy accumulation and moves in both these commodities could last into next year. Blue chip stocks are also in good shape here and as early as next week we should start to see new highs being reached.

QQQQ still in Line for $45.50

With the short week last week and the light volume on Friday, data from last week's close is not reliable. As such, we will withhold comments on market conditions today. We will say that while the market is vulnerable to a good hard pullback event, overall the trend is in great shape and sharp pullbacks may prove to be buying opportunities. For now, however, we continue to look for the QQQQ to run to $45.50, where it has significant resistance.

Holiday Rally Underway

Whether or not we are nearing the end game for this bull run, stocks and the market in general are looking very healthy here. In fact, momentum has a chance to pick up significantly with market's in the East now in strong rally mode (even Japan, which until yesterday had been quite weak). Dell is up 9% after hours, which should spark a fire under the NASDAQ. Unless we get a sell-the-news response, it's a good idea to stay long and enjoy the profits. We wish everyone a Happy Thanksgiving! Have a great weekend. We will reopen for business on Monday after the holiday weekend.

Broad Market Trend Showing Signs of Aging

Not much has changed since Friday's trading, so we will keep this brief and just summarize the current environment.

The QQQQ has a likely target of $45.30-$45.50. Given the money flow erosion on the Dow and the fact that other world markets are now breaking down (Japan in particular), it is important to not open any new long positions in the broader market here. We recommend focusing instead on the commodity sectors, which seem to have more potential at this late stage in the game.

Holiday Week Tends Towards Bullishness

We have a holiday week this week, so volume should start to thin out on Wednesday and be virtually non-existent on Friday when the market reopens. Nevertheless, last year the market was able to extend its gains during Thanksgiving week, and with the technical picture looking remarkably similar, we would not rule out a continuation of the current rally as we approach the holidays this year as well. We do recommend that everyone start moving more of their money into commodities. Oil has been a dog during the market rally, but is now oversold and firming up nicely. Some of the major oil companies like XOM and WMB have in fact broken out even as the price of oil has been testing its lows. This divergence tells us that the price of oil is likely to make a comeback and disappoint the oil bears who continue to doubt the long term energy trend.

Sitting Tight Through Today's Expiration

The QQQQ continues to be due for a pull back to its uptrend line provided in Wednesday's report. Continued gains from this level without a pull back make for an unstable climb, which would leave it more vulnerable for a hard correction. Despite the fact that this trend has been alive for longer than we have been used to trends lasting over the past couple of years, most technicals are in pretty good shape. Beyond that, we will refrain from calling a top. So many analysts continue to call for a top and as such have kept their followers from participating in this trend. Stops will take us out when the trend reverses. Once again, price is king and price remains solidly up.

As for today, today is options expiration and we tend to like to sit back and wait out this day each month. Options week is hard enough to navigate and on the day of expiration, price action can be even more meaningless. Next week is a short week as well, so it's a good idea to manage open positions and not open anything new unless something extraordinary presents itself.

Have a great weekend everyone!

Charts Continue to Look Healthy, but Expect Consolidation

The QQQQ may have made a near term top. Sentiment has grown overly bullish and yesterday's Fed meeting minutes took some steam out of the move late in the day. We still think that the probabilities are better than even that the QQQQ will test $45.50 over the next few weeks. Be slow to become bearish here. We suspect that the top the QQQQ made yesterday will likely turn out to be similar to the tops made on both October 16 and October 26. A sharp pullback here would do a good job at taking the wind out of the bull's sails, giving the dip buyers a chance to get back in again at lower prices. As long as the charts in our scans continue to look healthy, we plan to stay bullish. Price means much more than all other arguments and price remains bullish. Note: A long term selection was sent to subscribers today via email.

QQQQ Has Room to Move

The market followed through higher yesterday. Of particular interest is the fact that the semi conductors and small caps broke out. Certainly this rally is nearing its end stages. Nevertheless, the trend is still up and top calling has been killing the speculators for months now. We think we have some insight into where this market may be headed over the next few weeks. The QQQQ seems to be providing clues to those paying attention. First, yesterday's rally put the QQQQ back at overhead channel resistance. The S&P and Dow both have some room to move, but the QQQQ at the very least needs to correct by trading sideways for a few days in order to maintain the parameters of the trend that has been in place since August.

From the chart above you can see that the immediate trend doesn't have much more room to spare before a correction takes place. Panning back to a 5-year view however note that the QQQQ is gunning for its overhead channel resistance. Sine 2004 the channel top drawn on the chart below has been turning back the QQQQ. Over the coming weeks this resistance area of $45.50 should act as a price magnet. What happens after the QQQQ reaches this area is anyone's best guess. It is interesting to note, however, that the S&P and Dow have both taken out their overhead channel resistance and are continuing higher. It's too early to know if this has any real significance. For now though, the trend remains friendly to bulls.

Maximum Pain Could be Painful for Bulls Friday

The QQQQ pushed slightly over resistance yesterday. However, options expire on Friday and far too many bulls are holding profitable call options at this point. This means that bulls are likely to feel some pain this week as options sellers attempt to park the car in the garage of maximum pain this week. When dealing with major resistance, first breakout attempts often fail. A sideways correction that lasts a few weeks may be necessary to work off some of the overbought condition. For now though it's best to avoid chasing breakouts. Dip buying this week may continue to be profitable however.

Outlook Grows Surprisingly Bullish

Over the weekend we scanned stocks making fresh 52-week highs and then we examined these stocks from four separate time frames. We were quite surprised by the results. A little background is in order before we get into more details though. Mid summer this year the market outlook was about as dire as it had been in some time. The market for two years had been bumping up against overhead resistance and was contained in a depressingly tight range, which made trend trading all but impossible to profit from. The first part of this year had the market in a steady decline, which made it look as if the Fed's interest rate hikes were about to send the market into the next leg down from the bear market which had begun in 2001. Just when it looked like the bottom was about to fall out though, stocks rallied. The rally had many problems in its early stages, which we pointed out in detail in this report. However, as the rally continued, it firmed up and stocks started to behave better than we have seen them behave over the past two years that the market has been caught in its trading range. Getting back to this weekend's scans. Scan criteria included: stocks that are trading between $1-$50; which trade at least 250,000 shares per day; which are also making fresh 52-week highs. An astounding 489 stocks met these parameters. This is up from only 50-60 just a few months ago. Nevertheless, the QQQQ is back at major overhead resistance and the market is overbought. This gives us some pause. What perked up our interest even more though was when we scanned through each of these 489 stocks on their 5-year weekly charts. What we found when we did this were not a group of stocks undergoing distribution and bumping up against resistance. Instead, we found a large majority of these stocks already breaking out to fresh 5-year highs; trading firmly above resistance. Moreover, most of these stocks are not in the process of exhaustion-type moves, but are instead just steadily moving up on solid volume and solid technicals. Keeping our feet on the ground. We can't lose our heads here and grow Pollyannaish about the future outlook since this market remains due for a correction. But, if the QQQQ can keep chipping away at resistance and if the group of leaders in our scans can continue to build on their gains over the next couple of weeks, we may indeed be looking at the onset of a major multi-year bull move, the likes of which we have not enjoyed for two grueling years. We are keeping our fingers crossed and will admit we were wrong if bullish moves start to fail this week.

Market Continues to Rally

The election didn't slow buyers down and tech was under heavy accumulation yesterday. The QQQQ has a decent chance of breaking out to new highs from these levels. If it can muster continued buyer support and close over $43.20 for the week at some point this month, we would then likely see the rally into January. A QQQQ breakout would give buyers confidence to start buying up the high beta small caps once again, giving us more faster moving stocks to choose from. Right now the main strength remains in the big caps so patience is needed. Note: We will be taking tomorrow off.

Government Gridlock Likely Priced In

Democrats took over the lower house and as of the time of this writing, have a fair chance at taking over the Senate. The election outcome was in line with the latest polling results so the outcome is likely priced in to the market. Today's early trading might see a bit of selling by those convinced that a democratic congress is going to lead to bigger government and more spending. By late morning or early afternoon this should be muted or reversed. A democratic congress provides the nation with two years of gridlock; an outcome that will most likely put a cap on the big spending that has been taking place. While the election outcome is not likely to be the catalyst which launches the market toward its next move, now that the market has one less "unknown" behind it, business as usual can now get underway. Blue chips, which led the way up, are now undergoing distribution so we may be very near a correction. How big of a correction remains to be seen. With the recession now less probable than before Friday's employment report, the long term market outlook is less bearish. This however does not mean that the market cannot return to the summer lows before it rallies back up again.

Dull Day Likely

Today's price action should be muted as the market awaits election results. Gridlock is what the market wants and gridlock is likely priced in. If the Republicans can pull off a surprise we are likely to see fireworks tomorrow. We will cross that bridge if and when we come to it.

Friday's Jobs Report Changed the Outlook

Over the past week have been discussing the economic trend as compared to the trends in the stock market and the bond market. To recap, the bond market has been projecting a hard economic landing from the last round of interest rate hikes and its inverted yield curve has been projecting a coming recession. Contrarily, those buying stocks have been betting on a soft landing and more stable conditions. Economic data over the past couple of weeks has born out that the bond market was correct and that the stock market was not. On Friday, however, stocks received a boost from the jobs report, which may vindicate the position of stock buyers and show that it was in fact the bond market which had it all wrong. Friday's jobs report surprised the market (yet again) by adding jobs that had been missed in prior reports. The adjustments in this report over the past two months seem to indicate that the economy is growing much faster than other data has been showing over the past months. In other words, it now looks like the stock market was right; we are in for a soft, not hard economic landing. What this does is put the future rate hikes question back on the table, meaning that the blue chip sectors may once again become less attractive. On the other hand, it makes the more speculative small caps more attractive since they offer the potential to outperform the averages and create returns that offset the earnings erosion from rising rates. The stock market still needs to digest the news and could be quite volatile this week as it works through the implications. We should start to see some of the small caps produce good opportunities on the long side though and the impending strong leg down we had been looking for may now be off the table.

It's not the Data, but the Market's Reaction that Matters

Today the market awaits the monthly employment. The market's reaction to this report will be much more informative than the data in the report. Right now the bond market is predicting a recession and the stock market has been shaken, but not broken on fears that the bond market is correct. Since last Friday the market has received two important additions to current data that reveal the trend in the economy (not the market mind you) is rapidly in decline. Today's employment report will add more data to the mix. We will be taking the day off today, not adding any new trades. Today's market could be choppy and the close for the week will be a better measure to make decisions by than the potentially confusing first and second reactions to this morning's pre market report.

Recession Watch Heats Up

More data hit the wires yesterday forcing the market to contemplate what the bond market has known for a long time now; that a recession is just around the corner. The yield curve has been inverted for over three months now and as noted on Monday, the data about US economic growth shows a clear downward trend that is quickly heading toward zero growth. Nevertheless, indices closed near support levels yesterday and it is quickly likely that the inevitable will be staved off a bit longer as recently converted bears, who have now been conditioned to buy the dips, help push indices back up as we near next week's elections. If the market does crawl back up the hill here, it will make for a good low risk short opportunity. In the meantime, focus on gold and consumer staples and avoid the broader market like the hot potato that it now is.

Can Microsoft Save the QQQQ?

This market is getting tougher and tougher to trade as the possibility of a breakdown increases incrementally each day this trend ages more. Even so, the trend is still higher and we are seeing stocks firm up even at these high levels. MSFT, which plays a large role in the performance of the QQQQ refuses to break down and is now projecting a breakout of a multi year trading range. This could certainly change the technical picture for the tech sector.

Probably a Top, But Tops Take Time to Form

The trend is showing signs of topping as money flow figures have been decreasing even as prices have remained flat. Tops take time to form since smart money sells into rallies slowly in order to avoid a panic before their positions are unraveled and they have been able to put on their shorts. It is very likely that this is the process that is occurring at current levels. Meanwhile, overly eager bears keep trying to short this market. We think they are too early. In fact, there are a number of stocks where bears have been pressing too hard, trying to break stocks down against the still in tact uptrend. This is a situation that is likely to lead to a series of false breakdowns and short squeezes that can be taken advantage of.

Economic Trend in Rapid Decline

The trend is your friend is pretty much the basic battle cry uttered under the breath in mantra-like repetition of any experienced trader. On Friday the market got a fair look at the economic trend that has been unfolding with the release of the GDP report. The government has done decent job of covering up the declining economy and has given the market the impression that a "soft landing" was in the cards. In fact, economic growth has been in rapid decline, indicating that the recession projected by the inverted yield curve may in fact be right around the corner and not later next year as had been originally projected. The stock market reacted to this information by selling off against the underlying uptrend in a fashion that we have not seen since this trend began last summer. That was probably the warning shot across the bow. Wall Street has been doing a good job keeping this rally going and it seems unlikely that they will let go of this agenda prior to the elections next week. Likewise, as we mentioned, mutual funds are scrambling to put their latent cash to work as they close out the books on their fiscal year. These two factors should keep the current trend alive. That is to say that last Friday's sharp decline should be met with a sharp contra rally back up to the latest highs. There are signs, however, that this rally has finally hit the wall that will turn it back. Money has been flowing out of the Dow, which is a very different technical development from what was occurring as this rally was underway last July. Likewise, the semiconductor sector, which is a leading indicator for the tech sector, is developing a head and shoulders pattern and has met with sharp distribution on each move up to the upper end of its trading range. The S&P still has good money flow, which may be due to the fact that mutual funds are busy putting their money to work. The trend in this sector could continue for a while, while tech starts to diverge through underperformance. We will be using today to look for stocks that are rallying weakly back up to broken support in order to start balancing out our open positions with some shorts in the weaker sectors.

Top Callers Continue to Take on Haphazzard Shorts

We find it quite amazing that this bullish move has yet to reach the point of recognition where the bears finally capitulate and turn into longs. Shorts have been hitting this rally since the market bottomed back in July. We admit, we were skeptical and made our own mistakes trying to call a top up through September, to which we plead mea culpa. After the market showed that dip buyers continued to be as aggressive as we have seen in recent memory and once the small caps started to participate, we threw in our top calling towel and went with the flow. Thus far, it has been quite profitable to do so. Top calling persists in this market and shorts continue to attack the rallies. Yesterday QQQQ bears bought twice as many puts as they did calls. They may get lucky, but what we continue to find in this market are very nice buy set ups and a shear lack of distribution; just the opposite in fact, for every dip has found aggressive buying. It doesn't pay to throw caution to the wind here. The market remains technically overbought. At the same time, just because it is technically overbought does not mean that it cannot continue to climb higher. Strong market moves always go much further than most think probable or possible. We continue to warn against exuberance and at the same time warn about trying to call the top. Take the bullish set ups as they come and use stops to take you out when the market finally does turn. Gold is once again heating up, so pay attention to this sector.

Probabilities for a Correction Increase - But Don't Short Yet

Underperformance in the QQQQ compared to the SPY yesterday warns us that a correction is nearing. However, the QQQQ closed back at support and bears who shorted early are likely going to feel pain once again. The adage "be slow to go short" should prove true once again. One of these days – probably sooner than later – the top callers will be right. This market is feeding the top callers a great deal of pain though so it's best to just keep good stops on longs rather than going aggressively short here. One possibility we may see over the next two weeks is a tech sector that underperforms, but refuses to roll over, while the Dow and S&P continue to scratch out minor gains. We doubt that this market is heading for an exhaustion top here. Rather, it seems more likely that a healthy pullback will be the result of recent gains. The expected pullback would likely be a buying opportunity rather than a signal to go short. This is of course just one possibility out of many potential possibilities. For now, we remain in an uptrend, which is in tact until it is not.

Dip Buying Remains Strong

Bulls continue to relentlessly buy the dips as last week's dip back to support was followed by an explosive move back to the latest highs yesterday. What is most interesting here is the number of analysts who continue to doubt this market's move and the number of traders who continue to short the highs. In other words, this bull market has not yet reached the "point of recognition" where nervous retail longs finally realize that this is indeed a bull market and put money to work. They usually do so at the top, right before a correction. We have stopped trying to predict where this market may turn. Right now we strongly advice just taking what this market is giving – good long set ups – and leaving the top calling to those who are likely to continue fueling this move with their short covering. Protective stops should be used to take us out, not our human tendencies towards fearing the unknown. We read a great quote the other day: "if the market rewarded human nature, then nearly everyone would succeed." The wisdom behind that quote speaks volumes.

Trends are Bullish, but Extended

The QQQQ continues to look tired here. If it can make it back over $42.50 it is going to put a real hurt on a heavy institutional short position that is already hurting badly. However, if gets sold back down to $41.50 it will signal the beginning of a larger correction. The S&P and Dow both look much stronger, and while they are oversold and at risk for a pullback to their trend lines, dips remain buying opportunities. The end of the month should once again see a good rally take place. Since options expiration was last Friday, however, we could be in for some weakness as we start out the week this week. It is best not to get too aggressive until prices come back to better support levels.

Dip Buyers Continue to be Relentless

The sector to watch today is the semiconductors, which we like to track via the SMH. It has pulled back harshly to its 50-day average. If the current trend stays in tact, we should see it bounce today, which would prop up the QQQQ. Money flow into the blue chips continues to be good and even the tech sector has been finding late day support. Remember, the amateurs trade in the morning and the pros show their cards into the close. Pros have been buying the close for the past two days. So again, we remind everyone, don't be too quick to become bearish. The market may be overbought and may be near resistance, but signs of distribution are hard to come by.

Waiting on the CPI Reaction

Yesterday's PPI numbers gave the market a shake, but by the end of the day the Dow and S&P had almost fully recovered as dip buyers remained aggressive. A crack in the market's armor showed, however, as the QQQQ and semiconductor sectors reacted more harshly to the higher than expected inflation numbers. Likewise, the tech sector failed to make the same strong recovery that the blue chips were able to carve out. We are still projecting the rally in the blue chip sector will stay in tact for the next couple of weeks (and perhaps up through the November 7 elections). Tech, while not likely to turn into a downtrend just yet, will probably start to lag as it did last spring. Today's CPI numbers, if as inflationary or more so than yesterday's PPI, have the potential to knock the QQQQ back to support near $41.

Be Slow to Become Bearish

We could be facing a "turnaround Tuesday" today as indices looked a bit tired yesterday. We need to warn traders to be slow to turn bearish however. Dip buyers have been as aggressive as we have seen in some time and there are no signs yet that this is about to change. Breadth remains good and our scans continue to reveal a bullish underlying picture. The tech sector looked especially tired yesterday, but bears were aggressively buying puts at rates nearing 5-1 over calls. With so many betting on a top here it is unlikely that a top is in just yet.

Charts are Great, but Protect Your Gains

We would like to make two points today. First, don't forget where the indices are. Those betting on a large upside breakout at these levels are betting on the greater fool theory; that there will be an even greater fool to buy at higher prices. Keep cool here even if (especially if) the market goes into a panicked buying mode. Second, just because resistance is overhead and indices are not likely to make much progress, trade what is in front of you. If set ups are good, take them and protect yourself with a good stop loss strategy. Right now set ups are very good. Yes prices may turn at any time, but no one made any progress in the market worrying about what "could" happen. You have to take the opportunities that the market gives you and protect yourself against the turns by using good risk management.

Next Friday's Expiration May Cause Shorts Pain

The interesting thing about this rally is that it was never trusted. Even now with the market breaking out to new highs, there remains a high level of distrust. With options expiration a week from today, that distrust, which has caused aggressive shorts to sell into the strength, is likely to keep prices moving higher. Why? Options expiration generally works against those who have the potential to feel the greatest amount of pain. Right now it is the aggressive shorts that are getting squeezed, so the pain from expiration is likely to be pressed against them.

The Trend Remains Long Friendly

The bulls showed that they are still in control after a private plane crash in NYC caused a market scare. Volume on the recovery shows that bulls are still holding out for higher prices. As we stated yesterday, the trend is up until it is not. Right now it is up and it pays to stay long.

Keeping the Big Picture in Mind as the Market Climbs

We wish to keep today's report simple. We want to point out just a couple of points, that we think are important to keep in mind at this market juncture. First: the market remains in an uptrend until it's not. Until we have confirmation that the trend has broken, do not short dips or get scared and exit at dips. In other words, the long side is where the path of least resistance remains. The potential for a reversal is high, but the trend could possibly last until elections on November 7. Second: upside potential is small and downside potential is huge. Do not get carried away with the crowds buying breakouts at these levels. Breakout buyers at this stage are likely to end up as bag holders. On the chart below we have outlined where the QQQQ is at. As you can see, upside potential is muted, while downside risk is large.

No Update Today

There will be no report today due to traveling conflicts. Market conditions remain very much the same after Monday's session. There is no need to get agressive on the long side, but going short is probably premature at this stage.

Bulls in Control, but This is Their End Game

On Friday the market dipped, or rather the uptrend slowed, and options traders once again got bearish. No doubt about it, this bull run is in its end game here. Even so, as long as the crowds continue to get bearish on dips, the uptrend is likely to continue to chip away at their trading accounts by stopping out their short positions. The reason for this is relatively simple. The market rallies and the crowds get bullish. Short term profit takers sell the strength and the market dips. The crowd suffers a bi-polar-like mood swing and gets bearish, opening up large short positions as they attempt to pick the top. Subsequently, the trend (which is still up) reasserts itself and the new short positions add fuel to the rally as the crowds are forced to recover. This cycle will spin the market higher and higher and is the mechanics behind the phenomena oft referred to as "climbing the wall of worry." Eventually though, the crowd will learn the lesson and will begin BUYING the dips instead of selling them. When this happens, we can count on the fact that the top is either in place, or very close to being there. This week we wouldn't be surprised to see some consolidation or even pulling back. With the QQQQ and SPY both a few points away from overhead resistance, we would not count the uptrend over yet – especially with the crowds still selling the dips. Most likely longs will be tested this week and then the market will make another run higher before the uptrend finally starts to show signs of ending. Understand two things here and you will do well this month: First, this bull run is in its end game and downside risk far exceeds upside potential. Second, be slow to turn bearish, lest you find yourself being stopped out as prices refuse to follow through lower. In other words, wait for confirmation before going short, but don't be too aggressive on the long side.

Why Wednesday's Changed the Outlook

The Dow actually pushed above long term overhead resistance yesterday. Breakouts here are quite suspect, but momentum has the potential to push the market higher through the month, with a bit of backing and filling along the way. Risk increases now as momentum traders take over. For now we will try not to make any sweeping predictions and just ride the trend. As long as we continue to see decent set ups, it makes sense to stay long, using stop losses to protect against a price reversal. When this market comes down, it has the potential to come down fast. Until it does, however, this is no market to be short and long positions should continue to pay off. One brief comment about Wednesday's trading. Prior to the high volume, wide-range day on Wednesday, the market was at a pivotal point. Indices were at resistance. The market was likely to do one of two things that day; either break down or break out. Comments from the Fed helped it break out, which is why we were forced to shed our bearish posture. With the QQQQ breaking over its inflection point on Wednesday, odds seem pretty good that it will work its way back up to test last spring's highs. As it nears those highs, make sure to take profits into strength, but be slow to get bearish. This two month uptrend is at some point going to go through at a minimum a 50% correction. Until we get confirmation that the trend has rolled, however, over, it is a good idea not to sell the dips.

Bulls Deliver a Potential Knockout Blow

On Monday the QQQQ broke down from the rising wedge pattern we have been concerned with. Then on Tuesday the price rallied back to test broken support (then resistance). We were waiting for confirmation in the form of a follow through lower from that test in order to trigger a reason to get heavily short. Yesterday the market voted and confirmation was not to be. Essentially what we have after yesterday is a failed breakdown in tech and a rally which occurred with broad scale buying. Failed breakdowns must be respected for they generally lead to hard rallies. Over the past two months we have provided a lot of reasons why the market should not rally. The market has disagreed for whatever reason. Some suggest that there is a concerted campaign to pump and rally the market into November's election season. We don't know. This explanation is certainly as good as any other because the obvious reasons for the rally just don't add up. Whatever the case, a few important things have changed since yesterday. Market breadth was good, as was new highs among individual stocks. Scans, which have been dismal for the past few days, have now turned up quite a number of bullish set ups. Likewise, the Russell 2000, which had been lagging blue chips badly, has moved up to test resistance and is threatening a breakout. Should small and mid caps take over, the ensuing rally could be strong. At times like this, it is important to just take your lumps and admit defeat. In other words, if you can't beat 'em, join 'em.

Is a Rising Dow Bullish?

The media is cheering on the rising Dow as it pushed to yet another new all time high yesterday. Traders are hyping a rotation into the blue chips, arguing that we are entering a new era where blue chips will lead. We have to ask, these really bullish developments? By our readings, not really. The flight to blue chips is more indicative of institutional money that is getting nervous about the market. They have been moving out of the speculative small cap stocks (just check the Russell 2000 ETF IWM to see) and into the highly liquid blue chip sectors. This is what occurs at market tops not at market breakouts. And, since the Dow is leading let's take a close look at it. Below is the weekly Dow chart. Note that weekly resistance is at 11,840; just barely more than 100 points from yesterday's close. The Dow has been turned back at this rising resistance line each time for the past 2 1/2 years. Why should we expect this time to be different when tech lags and when speculative money is running for safe havens?

Note that the QQQQ accomplished the first leg (the up arrow) in the scenario provided yesterday. Now we wait to see if it will indeed be turned back at this area.

Bulls and Bears Likely to Be Frustrated this Week

Today we have two slightly competing theses confronting the market. First, the QQQQ broke cleanly from its rising wedge pattern.

Second, too many traders have been waiting for this break and put options sales were through the roof yesterday as a result of the break. When too many people in the market are looking for the same thing, the perverse nature of the market is to deny the crowds their satisfaction. We scanned everything today and there are just not good chart set ups out there despite the QQQQ breakdown yesterday. Longs are very likely to be frustrated as rally attempts should now get turned back at resistance. Likewise, eager shorts are likely to be frustrated today as follow through from yesterday's breakdown is unlikely. Very often when a major breakdown occurs, the underside of support is tested before the trend can establish itself. Evidence points to a test of resistance that gives false courage to bulls and frustrates overly anticipatory bears before the market can move lower.

We highly recommend not forcing a trade here. When stocks are not setting up the best policy is to wait until they are. Let the other guys struggle against the trendless environment and save your cash to take advantage of the situation once the smoke clears.

Friday Was Probably Meaningless

On Friday it looked as if institutions had achieved the prices they wished to close the quarter out at for the day was locked in a tight range. Breakouts where confined as sell programs kept a lid on things and then when prices started to roll over, buy programs put in just enough bids to keep prices from moving lower. As such, it's hard for us to make much of Friday's action and suspect that what happens today will be much more meaningful as far as helping us to determine what to expect next. The rising wedges on all three major indices should be the driving force that favors sellers this month. Today we would expect sellers to gain control of the market, but with last week's mixed messages, we are not making any strong predictions here. The most curious aspect of Friday's market was trading at the option's desks. Nearly 10 call options were purchased for every put option on the OEX desk. This is certainly drastically overly bullish, but when you get numbers like this, there could be alternative explanations that are much more benign. We'll just have to wait and see how today plays out.

Sentiment Readings Near Dangerous Levels

Today is the last trading day of the quarter and it serves the interests of fund managers for this day to close near current levels for the purpose of their reporting to investors. Of course it's irrational to use benchmarks, such as new all time highs for the Dow, to measure real investment performance. Nevertheless, headlines attract investment dollars into the market and keep the investors happy. Interestingly enough, scans show very little that would attract us into buying this market. Most of the movement in the indices over the past few weeks has been accomplished by large companies, such as Microsoft and Oracle, doing most of the heavy lifting. In fact, it is into the large float blue chip stocks that most money has been flowing. If institutions are worried about a breakdown in the trend, the safest place they can put their money to work – and remember, they must put their money to work by quarter end as the requirements of most funds are that the managers be fully invested as the quarter expires – is into stocks that offer enough volume to allow them a quick and relatively painless retreat once things start to slide. Yesterday the market held its highs in what we would consider a consolidation pattern. Major indices – in particular the Dow and S&P – seem to be gearing up for a spike higher. It is our opinion that the spike higher will attract sellers, but today at least there is a better than even chance the blue chips will close out the quarter on a high note. Several sentiment readings put traders at over 90% bullish levels, the highest they have been since right before the 2001 market collapse. While the market may look good after today's session, unless you are daytrading this is certainly not the time to be going long the market.

Selling Tech

The Dow made a new high yesterday, causing the media to turn on their hype machine, which finally convinced the crowds to buy this rally as measured by the OEX options pit, which sold nearly 3 call options on the S&P 500 to every put. This is where smart money wants the crowds. Smart money has been unloading into this rally as we showed yesterday. With the crowds finally reaching levels of exuberance, now smart money is able to short heavily into the euphoria without creating too much of a panic. The blue chips may have another day or two or even three to rally or at least maintain their highs. The QQQQ on the other hand, has lagged and is now primed for a top. Note the rising wedge pattern that has confined this rally over recent weeks. Yesterday the price bounced off overhead resistance, but found weak late day buying. Today, now that the crowds have had a chance to go home and watch the news and read their journals, they may be in an early buying mood today. This could theoretically push the QQQQ up to or even above $41. There we would look for sellers to step in heavily. For the second week in a row the SMH has been rejected at $35. Yesterday's hard reversal and failure to bounce at the end of the day even as the broader market recovered somewhat, is the canary in the mine that has stopped singing. This sector is the leading indicator for the broader tech sector and this sector tells us that tech is weak. Tops take time to form, but while the blue chips are working out their top, we suspect that, like the last top in April the QQQQ will start to come down early.

Time for Caution

In August, right before the market began to rally, we ignored an important buy signal in lieu of chart and volume patterns, which indicated more downside. Because we ignored this signal, we were caught on the wrong side of the trade. Now, interestingly enough, we are getting the same signal, only this time in reverse. NASDAQ 100 emini Sell Signal: At the beginning of August, futures markets for the NASDAQ 100 emini contract showed a breakout in money flow, which preceded the breakout stocks. Now the same contract has a money flow indicator that reveals smart money selling into the current rally.

Also note the important break in the uptrend line yesterday, even as QQQQ shares traded higher. Adding insult to injury, the S&P 500 made a new 5-year high yesterday, while the NASDAQ lagged significantly. This type of bearish divergence has preceded each failed rally for several years now. Gaming Window Dressers: End of month window dressing has been increasingly gamed by traders who have learned the pattern. Not that long ago window dressing would result in rallies which took place during the last three days of the month, and sometimes extended into the first two trading days of the following month. Now, however, traders have been taking advantage of the rallies and selling into them during the later days, causing the rallies to start to fizzle during the last day or two of the month. If this pattern persists, it means that today should market the last day where window dressing is able to push the market higher. S&P Rising Wedge: One of the most bearish of all rally patterns is the rising wedge, a pattern we have highlighted several times over the past few weeks in the S&P 500 index. We have hypothesized that before this wedge gives way to selling, a strong upside breakout would occur in order to draw in bag holders. Yesterday we got the initial move of just such a breakout, as can be seen below.

Window dressing may take this breakout up another day, perhaps two, but we argue that this breakout is very likely a bull trap, which will fail only to send the index tumbling back down to July lows during the month of October. Of course this last point is only speculation, but the rising wedge pattern is fairly predictable and given the divergence with the NASDAQ, the emini sell signal, and the fact that the 4-year Cycle low has not yet exerted its pressure, we think there are some pretty good reasons to take a seriously defensive posture starting this week. Once current buyers walk away and sellers are left without competition, this market can come down fast.

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