Nice, Wholesome Confirmation

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Copper has been awfully sneaky over the past few months. After its recent plunge, though, it became obvious that equities were going nowhere (at best), until Dr. Copper firmed up. Yesterday, copper miners FCX and SCCO both printed candles that potentially signaled looming bullish upside reversals. As always with individual Japanese candlesticks, though, confirmation is necessary. Today, as equities flop around with a bullish bias, both FCX and SCCO are putting in very strong sessions.

At the very least, the action in copper is telling bears to seriously back off for the time being.

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The breakdown below 1120 on the S&P 500 earlier this week proved to be a vicious trap for eager bears to short the move lower. The setup looked so easy that the idea was to at least for confirmation (a weekly close below 1120) before getting enticed to become more aggressive on the short side. The fact that such false breakdowns can occur even when everything is lining up for it to happen illustrates the power of cash, in that you can maintain your objectivity and avoid taking undue risks in a situation like that.

It is often said that from failed moves come fast moves in the other direction. After the failed breakdown below 1120 earlier this week, the bulls have made a ferocious short-term move back above 1120. However, the week is far from over and the picture is still nebulous. That said, the trap has indeed been set with the head fake below 1120 down to 1074 and subsequent sharp reversal higher.

With two full months of sloppy sideways action under our belts, the rejection of a breakdown should be taken very seriously, even if the bulls do not have ideal swing trading conditions quite yet. In other words, by temporarily losing 1120 for a few days, the bulls may have very well gained the tactical advantage.

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The metals have been staging a tough battle between bulls and bears of late, as denoted by the increasingly tight price action on their daily charts. Given that both metals saw swift moves down recently, the bears are obviously looking to press a secondary leg lower. However, a break above would likely lead to panicky chase higher. The stakes are high and these are both worth watching closely.

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I am holding one long position and got quickly stopped out of another. However, I am keeping cash levels well above at least 80% for now, until I see better quality swing trading setups. The exuberance that came with yesterday’s rally into the close has turned into a rather subdued leveling off process today. As I noted yesterday on my video recap, immediate upside follow-through today is not necessary for the bulls to putting in a tradable low. However, more and more charts do need to firm up and offer better looks than I am seeing right now.

Ca

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You can see how quickly the dynamics of the market can change. As recently as 3pm. EST yesterday, the bears were large and in charge of this market, before suddenly losing their grip in a fast and furious manner. Today, we are looking at some modest upside confirmation of the reversal thus far. The action is not quite as vigorous as the bulls would have hoped for, but it will suffice nonetheless. Over the coming days, we should see just how much firepower the bulls truly have here. To be sure, the bears will look to reassert themselves sometime soon, and it will only be then that we will be able to figure out how much staying power this sudden turn of events to the upside has.

As an example, note that the basic materials ETF could easily retrace to its declining 20 day moving average within the context of a downtrend, and that would represent a nice score for bulls playing the bounce. However, reversing the entire trend is likely to be easier said that done, as there are plenty of points along the way where bears are highly likely to get off the mat and fight.

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All of the bullish engulfing candles, oversized hammers, and bullish piercing line candles printed on Tuesday will not amount to much if the bulls do not confirm the upside reversal with a further move higher sometime in the next few days. It is always a dangerous proposition to place too great a significance on any one Japanese candlestick, which means that enthusiasm should be tempered for now. As evidence, consider the carnage that impacted bulls who automatically assumed the “hammer” printed on the S&P 500 daily chart on August 3rd of this year meant we had certainly bottomed. Not only did we crater the next day, but we have not come within 30 S&P points of the highs of that hammer since.

Should the bulls mean business this time, though, the issue is where to look for longs. You can pick through beaten-down garbagio, such as FWLT PWER TEX, but I have had more success sticking with winners who had outperformed a nasty market. Two such names are seen below. Note how price is above all moving averages with solid volume patterns to boot–Quite an accomplishment considering the ferocious broad market selling we have seen.

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