Maximum Boom-Boom

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MARKET WRAP UP 07/16/10

Despite the exuberance associated with the influx of breaking headlines in yesterday’s final hour of trading, today set up to be a classic case of selling the news. Add to the mix that today was also an options expirations Friday, plus the fact that we had some major earnings after the bell yesterday, and it is no wonder that traders’ emotions are oscillating from bullish to bearish as violently as the indices are from overbought to oversold. With the S&P 500 closing down 2.88% to 1064, the bulls are still counting on a higher low to end this correction. Alternatively, the bears are seeking to push us below the crucial 1040-1050 zone, yet again, to confirm the next leg in this downtrend.

As the updated and annotated daily chart of the S&P 500 indicates, the bulls were turned away from some crucial resistance levels today. Whether or not they can quickly regroup remains to be seen. If they do not, the bears will regain the initiative once again (see below).

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The charts of the emerging market and financial ETFs have made some real progress in the past few weeks. The financials have broken out of a steep declining channel, and retraced the breakout today. I cannot stress how important it is for the bulls to rise to the occassion next week, or else this breakout will have been a fake out (see below).

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The emerging markets have made a series of higher lows, and appear to be leading us out of this correction. Note the formation of an apex that should resolve soon. Just as with the financials, the bulls need to defend this constructive chart, or else all of their progress these past few weeks will have been for naught.

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On a more bearish note, the Nasdaq, Russell 2000, and Dow Jones Transportation Average all remain within their declining channels, and were firmly turned away from resistance today (see charts below).

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In sum, we are not guaranteed to make new lows just because we experienced a nasty selloff today. However, the closer we get to breaching the 1040 zone again, the more likely that scenario is going to play out. Erring on the side of caution is still advised.

As you might imagine, my portfolio took some lumps across the board, save $NTAP. Fortunately, my 64% cash position cushioned the pain–but pain nonetheless. I noted earlier today that weakness at the 1050 zone is where I would look to get more serious about swing trading some short positions. I will reserve the right to judge the action as I see fit, but if the bulls cannot step up next week, then I want to have a piece of the action when the lower lows appear to be inevitable.

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TOTAL PORTFOLIO:

EQUITIES: 36%

• LONG: 36% ($NR $NTAP $LULU $THOR $SAPE $SWSI)

CASH: 64%

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