Understand the Protocol

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It is up to you whether you choose to respect or ignore yesterday’s downside rejection. Either way, the bulls are, so far, following protocol.

On a 30-minute timeframe of the S&P 500, the bulls are doing everything that they need to do since yesterday afternoon’s stunning reversal. As I have been discussing, I am choosing to respect the downside rejection, as the bears had every opportunity to break this market down. Currently, stocks are consolidating the reversal higher in a rather constructive way, as you can see below. It is not the end of the bears per se, but when we are dealing with a market as seemingly random as this one has been over the past month, it is best to find a sensible timeframes where you can manage the levels. Here, a break above 1174 would now be significant (the chart below is actually the SPY), as it would take us up and out of this consolidation pattern.

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The highly-touted bear flag on the S&P 500 is losing its luster by the day, as last night’s tanking futures gave way to a benign open. The longer we see this type of action, the more likely we are dealing with a post-crash base in lieu of a bear flag, not unlike the way that I described in this video making the comparison to the 1998 Long Term Capital Management crisis.

As I write this, I see that the market is slightly green, with the Dow hovering the flatline. The Nasdaq is leading for the second day in a row out of the three senior indices, but I am most captivated by the strong outperformance of the transportation stocks. In my view, the bulls need the trannies to perform in a more consistent way. For most of 2011, the trannies have either lagged or been too choppy to figure out where they want to go.

Finally, keep an eye on RIMM. When the stock was in the low-$20’s, I argued that the stock was so bad it was good. Now, after a strong move higher, the much-maligned firm is working through what looks to be a bullish pennant. Keep it on watch for strength back above $30.

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Unless you have backed yourself into a corner with a perma-anything thesis, it is a good idea to respect the downside rejection that occurred on Monday afternoon. When looking for trading setups, the idea is to hone in on those stocks who have weathered this volatile market over the past few months, including a crash (for all intents and purposes).

I discussed the stunning relative strength in REXX last week, and it continues to consolidate its major breakout very well. Today, I was also impressed with the breakout in MXIM from month-long resistance. Note how in both cases the price action illustrates that prior resistance is turning into current support. If the bulls are for real this time, these types of setups are where I want to put my money.

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Direct Video Link Click Here

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The 30-minute chart of the SPY below shows that we held the lows from last Tuesday today. We also broke above the resistance trendline dating back to late last week. At issue now is whether we see more slap-chop type of action, or whether this is a durable bottom. There are simply too many moving parts for me to place a bet of any size on an answer right now. That said, 1140 is the short-term level to watch as support. If we lose it, that 1120 level I discussed over the weekend comes back into play.

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Just when it appeared the outperforming gold and silver miners would take off on a fresh multi-quarter breakout, they have once again proved just how slippery they truly are. With heinous gaps down across the board today, including a bearish evening star pattern confirmed in the silver miners, expect more nasty whipsaws in this sector without much overall progress.

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