The Floggings Will Continue Until the Market Improves

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MARKET WRAP UP 07/22/10

After the sharp decline that occurred in the final two hours of yesterday’s trading, many longs panicked out of their positions, while countless bears started to get excited at the prospect of another fast and furious multi week decline. Seeing as Mr. Market usually does that which frustrates the greatest amount of traders, it was only fitting that the senior indices gapped up 2% this morning and held their gains pretty much for the duration of today’s session.

With the S&P 500 closing up 2.25% to 1093, we now find ourselves back in a position where we have been at various points over the course of this correction, since April. With several key indices, sectors and individual stocks hinting at making major breakouts and bearish to bullish reversals, one has to wonder whether this will wind up being yet another vicious trap many into which many bulls will fall. As an example, turning wildly bullish on the morning gap higher on June 21st (not to mention at several other false breakouts in the past few months), would have been a huge money loser. The torture involved with acting on these false breakouts–and breakdowns–has made this market particularly frustrating for many traders who are used to making money in a trending market.

Thus, despite the improved daily charts that I am seeing, it is important to wait for more follow through and confirmation to the upside, before the bulls declare victory. As the updated and annotated daily chart of the S&P 500 illustrates, just because we broke out of the moving average “sandwich,” it does not mean that it is time to go all-in long just yet (see below).

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Please note that I tinkered with the upper trend line of the broad channel above, as I believe the new one more accurately captures the essence of the multi month broad trading channel of the S&P. Thus far, both the breakouts and breakdowns from this channel have been soundly rejected, each time.

Turning to other indices and sectors, the emerging markets, transportation stocks, small caps, and the Nasdaq all look to be leading us higher. Again, follow through is key. See my notes on their respective daily charts below.

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As noted earlier today here and in The PPT, I took some partial profits in $NR and $SWSI. I also initiated a position in $BX, based on its improved daily chart.

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TOTAL PORTFOLIO:

EQUITIES: 34%

• LONG: 34% ($ARUN $BX $NR $NTAP $SAPE $SWSI)

CASH: 66%

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