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We have some modest downside follow-through to Wednesday’s late-day selling going on this morning, but it is nothing too scary yet. The bulls, once again, defended the 1220-1230 zone on the S&P 500, which represented the very top of the prior multi-month trading range. However, to beat the drums again, the more times you probe a key reference area, the more likely it is to eventually give way. So, at this point I would resist the urge to complacently buy the dip with no clear exit strategy in place.

We also have a marginal breakdown from the widely-monotired symmetrical triangle on the S&P and many other daily charts. This could easily be a trap to shake out weak longs and punish eager bears, and would be the bulls’ ideal weapon of choice to launch this market higher into the holiday season. Recall that from failed moves usually come aggressive moves in the other direction. We saw that yesterday, in many respects, with seemingly bullish consolidation after bullish consolidation lined up and raring to go higher, only to suddenly be hit with the late-day sell-off. Thus, there remains considerable risk to either side of the trade.

I have tightened up my portfolio considerably inside 12631, locking in some gains and taking a loss in my 1/2 position starter in SNDK this morning. The good thing about layering into positions instead of buying or shorting all at once is that you can get out rather easily and unscathed should the trade work against you. That is exactly what happened with SanDisk, and that is our style in 12631.

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We know that Wednesday went out on a high note for the bears, with many bulls who were positioned for a seemingly inevitable breakout from the ubiquitous symmetrical triangle forced to hit the exits into the closing bell. Thus, the pertinent issue is just how dangerous the situation currently is. Earlier in the trading session, the oil service plays and the semiconductors were acting brilliantly, especially in the face of the widely-watched, high momentum “leaders” flashing red. Despite that relative and absolute strength for a decent chunk of the session, you can see the magnitude of those intraday downside reversals below on the daily charts of the OIH and SMH, respectively. Indeed, there were very few sacred cows spared from the fast and furious sell-off on Wednesday afternoon.

Putting Wednesday’s action into context of the overall picture, the broad market remains in consolidation mode just above the summer trading range. We have backtested the upper end of that range several times in recent weeks, and a basic tenet of technical analysis is that the more times you probe a key reference point, the more likely it is to eventually give way. So, there are only so many times the bulls can hope to save the day at around the 1220-1230 level on the S&P 500. Moreover, if you have been watching my daily video market recaps, then you know I emphasize the idea that no matter how pretty a consolidation or triangle appears, if buyers of size do not commit at least somewhat you will be hard-pressed to enjoy that elusive breakout.

While we are on the topic of tenets, you know that I always harp on the notion that individual candlestick analysis needs to account for placement. As an example, you can see what bears would call “shooting star” candlesticks on the charts below for Wednesday’s session. However, the shooting star is most valid at the end of prior uptrend, signaling the potential change in trend. This time, we are seeing this candle within the context of a broader consolidation. So, I would assign much less significance to that line of thinking. Beyond that, because we remain within bounds of the playing field in the consolidation, you have to be even more vigilant against potential traps. Wednesday could easily represent one of those traps for eager bears to have fallen into, again because of the placement of these reversal candles. To be sure, it was a nasty reversal after a potential breakout from the triangle, but it could just as easily mean these charts need even more time to base.

The nature of a consolidation is that getting too bullish at the top of the range is as perilous as becoming bearish at the bottom of it. At this point, the symmetrical triangles on the S&P and many other charts are so widely-watched that the consensus is that resolution is coming sooner than later. I am ready for anything, but another scenario I think is a distinct possibility is that the triangle morphs into another pattern as the choppy price action continues. Either way, inside 12631 we have a sound strategy regardless of the outcome, and we are notably outperforming even this dangerous market.

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(Sorry, this post is not about GMCR)

Despite high momentum names that are susceptible to late-stage breakdowns lagging today, such as CMG DECK LULU, there are plenty of individual issues and areas of the market that have been hanging tough in the face of this morning’s gap down. In recent weeks, and essentially since the October 4th broad market low, the bears have had a difficult time of extending losses beyond a morning, or perhaps a day or two at most. The bulls, on the other hand, have been showing more and more resilience in buying these assorted dips. Unfortunately for them, though, it has amounted to taking mere baby steps as we are overall still muddling along and a sustained uptrend has yet to materialize.

With the aforementioned “leaders” displaying chinks in the amor, energy stocks appear to be leading the charge higher. My FIRE and SNDK continue to act very well. In addition, the oil service plays are extremely strong today in both absolute and relative terms. From a more intermediate-term perspective, you can see the OIH is breaking out from consolidation and has potential to test its 200-day moving average above. NOV looks to be one of the better prospects in that sector. I also detailed a certain other area of the market that is exceptionally strong today earlier for members inside 12631.

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Another morning gap lower is currently being sorted through, as the bulls are trying to stabilize things. With all of the consolidations taking place on many indices, sectors, and individual charts, there are a few ways to interpret this action. On the one hand, you can argue that the bulls simply have insufficient conviction to break us up and out of this range and into a trending market. Alternatively, you might say that we are shaking out the “weak hands” before eventually screaming higher into the seasonally strong holiday season. The VIX remains stubbornly high above 30, although we do have options expiration this Friday which traditionally adds to the shenanigans in stock fluctuations. Despite the uncertainty, it is encouraging to see some areas of the market acting constructively. As a result, I have been running a long/short strategy, albeit net long, with good success inside the 12631 Trading Service.

In particular, I went long SNDK last week, timestamped inside our streaming, Twitter-like chat room with email alerts to boot. Currently, the stock is exceedingly strong in this tape. I am looking to add to this position should these morning gains hold, with the presumption of a breakout from consolidation looking to be a strong one.

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I could present dozens of charts to you this evening that show what should be bullish consolidations of stocks coiled up and ready to ramp higher. A few examples would be KLAC MA TER TLEO V. Seasonally, we are close to entering the bullish holidays, where shorts tend to ease off the accelerator even in the most vicious of bear markets. Beyond that, the bears have fumbled the ball countless times in recent weeks when attempting to push us back down into that summer trading range on the major indices.

With all of that said, this market is going nowhere unless some buyers of conviction and size start to make some bold bets. All of those pretty charts will not amount to much if the aforementioned potential buyers have the heebie jeebies for whatever reason, be it Europe, the Euro, China, the price of oil, etc.. I realize that we could simply drift higher here without volume, but as you have been witnessing for yourselves over the past few weeks we could just easily go sideways.

I am currently net long and have been crushing several trades inside 12631, such as BSFT and FIRE. My sole short is AAPL which, frankly, I would not mind getting stopped out of, due to my long positions. However, the AAPL trade fits perfectly into my style, with earnings and major headlines out of the way, sentiment for the company and stock still wildly bullish, and several technically compelling reasons to go short. It is tough to imagine the market rallying into the holidays while Apple sells off, but perhaps it is that type of thinking that makes it even more strategically correct to short the stock here.

Apart from that short, I am actively looking for longs, especially if the bulls can truly get their acts together. For now, though, the market is stuck in the dreaded “friend zone,” doing all the heavy lifting that a long-term relationship (trend) requires, but not getting much action. The bulls could use a pep talk like the one below.

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