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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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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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MARKET WRAP UP 07/06/10

The past eighteen hours have featured several reversals, frustrating bulls and bears alike with respect to timing Mr. Market’s short term machinations. It was just late last evening that traders were eyeing a major breakdown, with the futures printing close to 1000 on the S&P 500. However, those futures recovered impressively by the opening bell this morning to catapult us to 1042. At that point, we reversed course and slowly faded those intraday gains, before chopping around to close up 0.54% on the session to 1028 by the time the closing bell rang.

Ironically, all of these herky jerky moves in this slip ‘n slide market can be viewed as cathartic and an overall bullish omen, as the last of the complacent bulls are shaken out. It will be only if we break–and hold– below the July 1st intraday low of 1010 that the hammer will have been negated. Beyond that, the broad indices and sectors remain oversold.

Nonetheless, as the updated and annotated daily chart of the S&P 500 illustrates, the 1040 level acted as resistance today, after being support for several months (see below).

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Turning to other sectors, the emerging markets represent perhaps the most notable pocket of strength, as their ETF put in a nice hammer last Thursday, and has seen sound confirmation even since (see below).

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Conversely, one of the recurring arguments advanced by the bears since last week has been the persistent weakness in the transportation stocks. To be sure, they did not print a hammer last Thursday, so much as they did a long legged doji. However, as I note on the daily chart of their ETF below, the trannies are in a tight falling wedge, within the context of a downtrend. This is often considered to be a bullish reversal pattern.

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Perhaps the most inconsistent argument that the steadfast bears have been making is that the small caps are the “tell” for this market. Nothing could be further from the truth. The recent weakness in the small caps has caused many bearish traders to argue that the broad market has much further to fall.

However, as you can see from my chart below, the small caps have not been leading us down and, in fact, have been outperforming the broad indices and sectors throughout this whole correction since April. Indeed, the small cap ETF has yet to breach the February lows, whereas we already know the broad indices did so early last week. For the small caps to finally show weakness now would be much more of a lagging, than leading, indicator for the market, in my view.

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My analysis continues to lead to me to believe that this market is headed higher in the coming days and possibly weeks. I do not challenge the overarching downtrend since April. In fact, I foresaw it. However, I see technicals and sentiment lining up in favor of a short term bounce.

Individually, my top holding and best idea is still $NR. If you agree with my bullish analysis of this issue, chasing it here is still not correct. However, you will want to keep a close eye on it for a benign pullback, given the strong and consistent buying volume over the past few months (see below).

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Finally, should the market see some sustained buying in the coming days, my top short squeeze idea is to play the homebuilder sector, as I detailed last evening. A stock like $LEN would give you a high beta short squeeze, for a short term trade.

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Have a safe, happy and patriotic Fourth of July weekend, guys!

Thanks for your loyal readership over the past two months.

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[youtube:http://www.youtube.com/watch?v=E6caJv__WSM 450 300]

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MARKET WRAP UP 07/01/10

For the eighth time in the past nine trading sessions, the S&P 500 ended lower than where it had closed the previous day. A morning gap down took us to 1010, before buyers finally summoned the intestinal fortitude to momentarily fight off the bears into the session’s choppy finale. With the S&P 500 finishing down 0.32% to 1027, the key index printed something akin to a bullish reversal candle.

The last time I talked about the bullish hammer candlestick was on May 25th of this year. As I noted then,

In Japanese candlestick terminology, a bullish hammer often signals a trend reversal.  Above all else, the hammer  (on a daily chart) shows that the price drops significantly from where it was at the opening bell, yet rallies back towards the end of the session up near the opening price level.  Some key elements are: a prior bearish trend, little or no upper wick to the candle, and a small body at the top end of the hammer.

Beyond that description of a hammer, I also noted that a necessary factor is confirmation. In other words, seeing follow through from the bulls to the upside after the hammer has been printed is crucial to validating the reversal pattern. As we all know by now, that May 25th hammer on the S&P was good for a short lived long trade, that abruptly ended with the fierce selloff on June 4th. Although you would have made a short term profit had you bought the hammer, and then sold a few days later, one of the reasons why I believe that hammer eventually failed was because there was a lack of uniform hammers being printed on other indices and stocks across the board. This fact made it difficult for me to have much conviction in the days following the hammer.

First off, let us take a look at the updated and annotated daily chart of the S&P 500, seen below.

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Next, the $QQQQ ETF has been down ten days in a row (!), and printed a hammer today. Although there is a small wick on top, the gist is that the sellers seem to have exhausted themselves today (see below).

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The $IWM small cap ETF has a similar type of hammer to the $QQQQ and $SPX.

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I could run through all of the indices, sectors and issues, but a great many of them show similar types of candles. Though far from perfect hammers, they still need to be respected given the swoon we have seen. My analysis leads me to believe that the steep downtrend of the previous two weeks (and possibly the past two months as well) is poised to take a break in the form of a reflex rally. Accordingly, I allocated 40% of my capital to the long side today, as noted in an earlier post. Being a contrarian is not one of my hallmarks, but I do believe that taking on risk when I see an edge will always be a weapon in my arsenal. Whether this is a yearly bottom is anyone’s guess, and I have no interest in betting on something like that. In fact, I do not need to. A tradable temporary bottom is all that I think is worth betting on at this point.

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TOTAL PORTFOLIO:

EQUITIES: 40%

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

CASH: 60%

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MARKET WRAP UP 06/30/10

Today was yet another example of the kind of mass psychology that is at play when everyone is looking at the same thing. The discussion of the 1040 level on the S&P 500 acting as support had become so ubiquitous that it was only a matter of time before that price was violated. After being flat on thin volume for most of the day, stocks eventually gave way in the last hour to another bear rout, as the S&P 500 closed down 1.01% to 1030.

The intraday low today was actually 1028, which represented a slight breach of support from last Halloween, when 1029 was the intraday low on November 2, 2009. Beyond that level, 1019 was the intraday support from the lows of the early fall correction on October 2, 2009. Those levels also represented a great deal of resistance from late last summer as well. Thus, the 1019-1029 zone is likely to represent a less obvious, but also more valid, support level than 1040 had become in recent days.

Beyond those support levels, the bears also pushed us down through the lower end of the broad trading channel that had been forming over the past five weeks. As the updated and annotated daily chart of the S&P 500 illustrates, testing a support level can only hold for so long before it eventually gives way (see below).

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Interestingly, the Nasdaq has yet to breach the lows from February of this year, as I indicate with the pink line in the chart seen below.

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Moreover, it can be argued that the small caps are still making a series of high lows, as I indicate in the zoomed out daily chart with the pink line, seen below.

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Now, objectively speaking, bulls will argue that these are bullish divergences, as the small caps and Nasdaq charts indicate that we have yet to see a major breakdown. Bears will argue that the S&P has already broken down, and that the Nasdaq and small caps are simply going to play catch up to the downside.

Personally, I believe that we are oversold and nearing a tradable rally. However, I have yet to put money to work supporting that idea. Adjusting my style for this market, I would be looking for a gap down tomorrow morning to buy. If we open sharply higher, or merely drift around like we did this morning, I may very well take a pass and stay in 100% cash.

Finally, let us take another look at my main tell for this market, $FCX. The weekly chart indicates just how significant this $59-$60 zone is, going back to last summer. As you can see with the pink line, this level was key resistance all throughout the summer of 2009, before the stock eventually broke out above it and ran to above $90 by January of this year. What is at issue now, is to confirm whether that prior resistance level can now be deemed a current key support zone, from which the stock can move higher. To convincingly break down below it would tell me that the S&P is eventually headed much lower.

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NOTE: I have discussed the seemingly inevitable “death cross” (as I call it) coming in the S&P 500. “The Big Picture” blog, currently ranked #2 on iBankCoin’s list of the top finance blogs on the internet, has some great work out today–taken from another blog–on the historical statistics associated with performance after a death cross on the S&P. Check it out here.

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