Now We See What This Market Is Made Of

The market has run into some important resistance levels the past few days and after more disturbing economic reports this morning has rolled over pretty hard.  We are down to test the rising 5 day moving average, an important level.  This level also corresponds to a gap fill from the open on the 13th.  The rally which has taken place over the past few weeks has done a few things, let me lay them out.

Stocks which had broken down hard throughout May and June but still held important levels are now basing out nicely.  I am starting to see a lot of good setups to the long side intermediate term.  There are still some great relative strength names in this market on the long side.  The past two days though have gotten them very overbought short term.  Today we are starting to see these names pull back.  Now, the question of the day is, will these names pull back over the next few days and find support, creating very good risk/reward entries on the swing trading time frame?  Or will the roll over hard as the broader market did this exact time in June?

It makes no sense to guess, we will see soon enough.

We’ve gone from extremely short term oversold levels a few weeks ago to very short term overbought levels this morning.  It made zero sense to be entering new long positions yesterday and today.

One thing that I always like to keep track of are the sectors and industries which are leading to the down side.  Markets have leaders in both directions, and when those stocks become too oversold on the intermediate term time frame, you can expect a counter trend move.  Nothing goes in a straight line, except for commodities.  The housing sector had been down for so long that it was bound for a bounce, which we are now getting.  The same can be said for the oil services industry.  I believe both are still oversold and will probably see at least a few more weeks of consolidation, if not a further move to the upside.

Can tech lead us higher without any other major industries?  Maybe, but I wouldn’t bet on it.

Here’s what I want to see to begin really exposing myself to the long side.  A pull back here where volume is even lighter.  I want to see a few weeks of basing and then a high volume push to the up side.  As I said the other day, it’s entirely possible the market pulls the same stunt it did in July of 09′ and just rocket off from here, but I wouldn’t bet on that either.

The economic data is bad and continues to get worse.  Don’t let that keep you from participating on the long side though.  The market is all about capital flows, and if traders get the feeling that the US government is about to pump more money into the system, they will react no matter how bad the data is.  I believe this is what we’ve seen over the past few weeks.  Things were getting bad out there, and traders placed bets against the US Dollar thinking that we had more stimulus coming.  If you think the Fed is going to let this market tank into the mid term elections, you need to ruminate on that a little longer.  I’m not playing politics here on either side, I’m just saying that the Fed has become very political, they are holding up asset prices so that the feeling out there on main street doesn’t go to shit.  They believe in the fact that if main street sees their 401K growing they will believe that it’s safe to spend money, and that things may be getting better.  They are not for the most part.

Keep an open mind, but for the time being I would still recommend staying very small.  I have a few long and a few short positions.  Frankly, I’ve gone nowhere in the last few weeks in terms of overall performance.  I will never be massively short, but if this market can prove itself here over the next few weeks, I will step in heavy on the long side.

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