Stock #Market Recap 12/20/11 {Video}

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The huge opening gap higher is melting up this afternoon, as bears appear to have hit the beach or ski slopes for vacation. Of course, the issue now becomes whether this rally has legs. With the S&P 500 recapturing 1220-1230 for now, I am not interested in stalking shorts at this point. Earlier today, I closed out the rest of my CRM short at $104.80 with entries at $126 and $115 inside 12631. Despite success on the short side with trades in recent weeks, the bears have yet to prove that they own this market. So, I am not itching to play for the big breakdown and likely will not be seriously looking at that scenario until I get a feel for the action in early-2012.

A few names on the long side that intrigue me: GNC HANS NUAN PIR. These are still far from ideal conditions for swing traders to pounce on the long side, but if Santa Claus is finally arriving on Wall Street for the holiday rally then I am willing to play along.

http://www.youtube.com/watch?v=VRTngtsOY8Q&feature=youtu.be

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My working thesis, which I have written about here, here, and here, is that if the market can sustain a breakout here it will be led by more value-driven, “boring” type of plays such as what you find in the Dow Jones Industrial Average. As an exercise, I encourage you to compare the health of charts of prior high growth market leaders, such as AMZN CRM PCLN, versus current Dow components BA (Hat Tip to 12631 member “flicker”) HD WMT XOM, and many others. There is a stark difference, indeed. with the latter grossly outperforming the former. Therefore, the issue then becomes whether the Dow components can have a self-reflexive nature to the point where they pull the entire market higher with them, even if prior leaders are now laggards.

In that regard, what I wrote back on December 1st is worth repeating here:

Accordingly, I continue to probe the thesis that we could easily be facing a market filled with more subtleties. I doubt even if the bulls continue to gain footing here, that traders will simply be able to “buy the leaders” and head out to run some errands or go to lunch and magically get rich. Instead, I suspect more of a stock-picker, value-oriented market awaits. In other words, do not get too giddy if the broad market breaks out in the coming weeks, because this time around it probably means you are going to have to work harder than ever to outpace your competition.

After a week of uninspiring price action, we are seeing a massive gap higher this morning that is sticking, thus far. Consistent with how the market has acted throughout 2011, both bulls and bears are being put to the test. My modus operandi is to block out the noise and emotion of the moment, and analyze where we truly are at this juncture. First and foremost, the bulls recaptured (for now) the key 1220-1230 area on the S&P 500. There is an array of bullish marubozu candlesticks being printed as we speak. Obviously, for the candles on daily charts we are going to need to see how this session closes. I would not be surprised to see the bears make a little push this afternoon to take things lower, but with the holidays approaching my sense is that the market is going to melt up on low volume and close at the highs of the session.

That said, all that has happened with the huge move higher today is that we are back to the midpoint of last Tuesday’s trading session. Beyond that, with the continued opening gaps it continues to be a difficult environment in which swing traders can put on high probability longs. The good news is that volatility is collapsing, as the VIX is starting to really come in here, breaking into the low-20’s. While the day-to-day gaps are highly dramatic and bring out the sharpest emotions in traders, in the grand scheme of things you will be better off blocking out the drama and focusing on whether the market is healthy underneath the surface. The best way to do that is by going through chart after chart after chart. In time, if the market truly is going to pivot towards a fresh uptrend, we will most certainly see it reflected in improved daily and weekly charts.

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It has been a while since we took a look at copper mining giant, Freeport McMoRan. As long-time readers of my work know, Freeport has been a useful “tell” for me in terms of the broad market direction over the past few years, although as 2011 progressed that tell has become increasingly murky. Back in January, I made this video for 12631 members making a fairly bold call that the monthly chart of FCX flashed an ominous “dark cloud cover” pattern. I extrapolated that Freeport had most likely topped out for the foreseeable further.

As it turns out, that marked a multi-quater top to the stock, as you can see on the weekly chart below. Consistent with Freeport being a good (but early) “tell,” it topped out several months in front of equities as a whole. Presently, Freeport is trying to stabilize after a steep decline. However, the risk of downside continuation remains high, given the apparent rising wedge nearing completion. As much as I want to have a reason to look for and play a major bottom in Freeport, I have little evidence to do so, yet.

You can also bet that bears are looking to crack $35 here, which should bring in more sellers as price breaks below this weekly rising wedge. I am not sticking a fork in Freeport McMoRan, but my risk/reward analysis has me waiting until the bulls can get this back above $40 before I become interested again on the long side, anytime soon. As far as being a tell, thus far all Freeport has done is confirm the S&P 500’s higher lows since early-October. In and of itself, though, that is not enough of a reason to declare a major bottom.

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