Oh Snap!

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MARKET WRAP UP 07/08/10

Following up on yesterday’s 3% plus rally, the S&P 500 consolidated most of the day today before sprinting higher into the closing bell, to finish up 0.94% to 1070. As I mentioned last weekend, the broad market had become so oversold and stretched to the downside that we were likely to either crash, or violently snap back to the upside. Continuing with my rubber band analogy, clearly the market did not break but, instead, snapped back in the other direction.

The key issue now is whether we continue to move higher in a straight line, if at all. As the updated and annotated daily chart of the S&P 500 illustrates, we are suddenly close to revisiting the 20 day moving average, not to mention all of the overhead supply presumed to be found in the mid point of the broad trading channel (see below).

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Thus, although it is clearly a bullish development that we have seen confirmation of the hammer, we must also come to terms with the overhead resistance that looms. Many bulls were trapped in our most recent selloff down to 1010, and it is hard not to expect some near term profit taking. When I titled my post yesterday, “Commence the Battle,” I was referring to specifically this type of situation.

On the one hand, the near term setup is bullish, with the hammer and follow through from last week. On the other hand, we must contend with the longer term prevailing downtrend since late April. I expect those two competing forces to accelerate the fight on the market battlefield in the coming days. Bears are not likely to give up their longer term initiative quite so easily, as they have a confluence of factors still in their favor, such as all of the major moving averages sloping down above our current price action.

I must say, however, the argument that the volume on the broad indices has been uninspiring may prove to be a trap that many bears will fall into. As an example, the volume throughout the February-April rally this year was downright lousy, but you would have missed a great move in terms of price action, from 1043-1219, had you sat it out on the basis of weak volume. Moreover, we are in the middle of the summer, where volumes are historically light. Hence, the focus should be even more so on price action than anything else, in terms of looking at the broad indices.

With my 60% cash position, I will continue to be patient before I become aggressive in this market. Into the huge rallies over the past two days, I took some partial profits here and there. There are several stocks I am stalking for long entries on pullbacks. I am pleased with how the charts of  my current holdings are looking, notably $APKT, $NTAP and $NR (don’t chase!). Below, you will find the names at the very top of my list of scans. However, I will not chase them higher. If they run away from me, then so be it.

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TOTAL PORTFOLIO:

EQUITIES: 40%

• LONG: 40% ($NR $NTAP $LULU $CRM $THOR $APKT)

CASH: 60%

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