Looking for Follow Through

MARKET WRAP UP 06/10/10

The bulls earned a resounding victory today, as they bid stocks up across the board to close the S&P 500 up 2.95% to 1086. While breadth was strong, volume was particularly anemic in several key indices and sectors, such as in the $SPY, $QQQQ, and $IWM. One of the stronger areas of the market has been the transportation sector, and the volume there was slightly above average today on the $IYT‘s 4% rise.  So, the bulls can point to that as a sign that validates the rally.

As I have been discussing for several days now, rallies within a downtrend are characterized by the strong emotions of market players. Many aggressive bears who have been successfully pressing their shorts the whole way down suddenly find themselves falling victim to a heinous squeeze. On the flip side of the coin, the bulls who have been buying the whole way down start to feel redeemed, and become giddy.

There are also those traders sitting in very high levels of cash. Many of them, on days like today, quickly become fearful that they will miss out on a big move higher, and start to chase stocks up. What is amazing to me is how abruptly traders can change the object of their fears within the span of a day.  One trading session they are fearful that the market will have an epic crash, and the next they are scrambling to accumulate long inventory on the fear that the market will never pull back and give them an entry point to buy.

A better approach, in my estimation, is to block out all of the noise and emotion. Instead, the idea is to focus on the health of the market via seeing the big picture in terms of price and volume.  Without sound technical bases, combined with a strong underlying bid from institutional buying, it is unlikely that stocks will be able to hold a sustained uptrend

As the updated and annotated daily chart of the S&P 500 illustrates, today’s rally was impressive, but does little to change the bigger picture (see below).

Look for  the 20 day moving average, currently at 1091 and sloping down, to be a key battleground area should we see follow through in the coming days.  Also, note that we are now back up to the choppy zone where we spent the last half of May. Many market players who tried to pick the bottom were badly hurt on our most recent selloff in early June. So, there is the concept of overhead supply to contend with. As they are close to breaking even after a wild ride down, the bottom pickers are likely to take some money off of the table.

Frankly, a few days of quiet consolidation with an upside bias would be ideal here, so long as that kind of action entices institutions to reenter the market as serious buyers to support stocks. However, what I would like to see happen is irrelevant. The market does what it does, and feeling one way or other about it is futile. The key point is to look for follow through: Continued buying, on volume, across the board which helps firm up daily charts. As a swing trader looking for next big move, that is what I am looking for in order to get back involved in this market on the long side.

Finally, to continue with an ongoing theme, here is an updated and annotated daily chart of $FCX, which has been my tell for the broad market. The stock is rallying back to its major breakdown point on meek volume. Should the stock continue to rally on weak volume up to its breakdown zone, and then roll back over on strong volume, I will look to add short exposure to the market at large. Watch this one closely.

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