Commence the Battle

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MARKET WRAP UP 07/07/10

After remaining uncomfortably oversold for several days now, the market finally sustained a rally from bell to bell. With the S&P 500 closing up 3.13% to finish at 1060, the bulls sliced up through the important 1040 level with ease. The type of candle printed today on the S&P, as well as across other indices and sectors, was the bullish Marubozu, where the opening price was very close to the low of the day, and the closing price was at the highs of the day. There are no shadows on this candle, and it indicates how strong of a day the buyers had.

On the other hand, volume was not particularly impressive today. Further, we are still within the context of a broad overall downtrend, and overhead supply as well as aggressive bears are likely to cause some turbulence in the coming days. My recent call for a rally was solely predicated on the idea of a near term bounce, as I indicated last evening. Going forward, the bears will most certainly look to reload their short positions in the coming days. In order for the bulls to complete a longer term trend reversal, much more work is required than what we saw today.

As the updated and annotated daily chart of the S&P 500 shows, the bulls are back in the hunt. However, the true battle appears to be just getting started (see below).

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On days like today, it is easy to forget that we are still operating below all of the major moving averages, which are declining. However, we are seeing some bullish developments that need to be monitored closely, before we conclude that shorting every bounce is the default strategy.

Updating a few charts from last evening, you can see that the trannies broke out of their falling wedge on pretty strong comparative volume today.

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The emerging markets bottomed before the S&P back in late May, and have been leading the charge ever since. Note the rock solid follow through from last week’s hammer.

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As I mentioned on Monday, the homebuilders looked prime for a heavy short squeeze from the all-important $14 level, and names like $LEN ripped a few faces off today of the latecomer bears. The top name on my list of scans, however, is $SAPE, as per my earlier post on the bullish engulfing candle.

If you have been following my trades, then you know that I still have an overweight cash position, as a sign of respect for the prevailing downtrend since late April. Throughout this correction, I have not wavered from holding high levels of cash. However, from time to time it is correct to remove hedges and have long only exposure. The bears were caught leaning too hard, and the bulls can now run for a while longer. I do expect the coming days to be a bit tougher for the bulls than today was, but to automatically assume that the bears will move in and push us back down to new lows would be conclusory.

Finally. I would be remiss if I did not chime in on the Euro/Dollar. I see many traders are pounding the table to short the Euro here, betting on it to roll over. These are probably the same types of traders who got caught short equities in July 2009. Folks, the time to short the Euro in size was a few months ago. If you really want to scalp a few pips that badly, then go for it. However, the inverse head and shoulders bottom and subsequent breakout and flag in the chart below leads me to believe that the Euro is a long, if anything.

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TOTAL PORTFOLIO:

EQUITIES: 44%

• LONG: 44% ($NR $NTAP $LULU $CRM $THOR $APKT)

CASH: 56%

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