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July 18, 2009

Potential Breakaway Gap....Watching 956 Pivot.....
by Jack Steiman

Market Overview:

When we look back a month or so from now, it is quite possible that we will be talking about what took place on July 15th. It was on that day when we saw a breakaway gap over the old 912 gap that seemed impossible to get back over while the bulls were fighting to simply hold the 875 neckline. We had been testing that nasty 875 level over and over. We held when suddenly, and out of nowhere, we gapped hard over 912 and just kept on running for the rest of that day. Volume was quite strong and the advance decline line was quite powerful as well. Two necessary ingredients to confirm such a gap up and run. If that gap had been accomplished on lighter volume or by just a few leading, heavy weighted stocks, it would make the whole move just another meaningless head fake. The bulls celebrated in that they did get what was needed in the volume and the advance decline line thus it was something that had to respected. The gap also provides good news to the bulls in that it puts another very powerful support level at 912, protecting 875 down the road. When you get a gap as powerful as what we saw Wednesday above the critical neckline at 875, it makes the task of breaking down by the bears much more difficult. Lots of money will come in and support this market at 912 now. It's an extra layer of clothing for the bulls that has to make them feel more secure. What's even more telling is how the market, on the short term time frame charts, has stayed grossly overbought since that gap up on Wednesday. The bulls feeling braver and braver while the shorts are willing to cover more quickly than usual. They understand the power of this gap and know their task is harder here thus the desire to not stay around too long and watch their money erode away. That's how overbought stays overbought. We will need some selling soon to unwind things some but that selling should be more shallow than what we could have expected without that breakaway gap in place. It's a game of emotion and the emotional component here is the greed of the bulls versus the fear of the bears and fear is a much deeper emotion to deal with. People respond to fear a lot faster than greed.

With all we have seen in the past three trading days, I guess that means that we will be rocking higher soon. Well, that's not necessarily the case. I do believe that we will take out that 956 pivot soon but you have to keep in mind that we have been here before. True, we didn't get there the same way technically but we are still trading below 956 and that has to be fully respected. the bears have found ways in the past to keep the market from clearing. I don't think they'll be able to do that here, at least once we get some healthy unwinding. However, you never go overboard and go 100% in equities until you see the 956 level in your rear view mirror. It needs to clear and run not clear and churn. Until this takes place, please play this game appropriately and keep your exposure to no more than 50%. You can't go wrong keeping it less than that but if you need to be more aggressive, keep it to 50% please.

Sentiment Analysis:

The bears are rocking. Many reliable surveys have more than bulls entering this weeks action. That's not something you see too often. The latest survey of market advisors also shows a dramatic increase in bears last week of nearly 6% along with a major decrease in bulls of lightly over 7%. This 13% difference has cause a dead heat at 35.6% bulls and bears. That's normally very bullish. Far too many bears. Par is not normally what you see in bear markets. When you get an equal number of bulls to bears it's rare to see the markets decline. In addition, the Vix and Vxn have broken down which usually sets up a formula of higher equity prices. From a purely sentiment perspective, the bulls have the ammunition they need to see overall higher prices. Nothing straight up but higher prices for sure. Add in the fact that many on the financial stations are still ranting on about that head and shoulders which has already been made null and void with the action over the last three days and lets just say that I don't expect a whole lot of downside action other than normal overbought oscillator unwinding that always takes place in good markets.

Sector Watch:

Thanks to some very strong reports in the Technology Sector the Semiconductor, PC, Software and Telecom sub groups saw very strong moves during the week and continue to lead the market higher. INTC and IBM reported blowout numbers and GOOG came in solid although sold some after a strong upside run. AAPL reports next week and will be inflectional for the Techs. In addition, some strong numbers in the Home Construction area started to lift that group late week. See our 5th and 6th charts below. The Banks moved higher on the back of a blowout report by Goldman Sachs and solid numbers by JP Morgan. The Transports remain mostly mixed with many reports due out next week. Copper and Shipping Rates two areas that tend to lead the economy continue to show good price action. Most other Commodities showed signs of firming up as the week wore on including the Oil Service area. Earnings continue to have a major impact on specific groups and are providing some nice visibility not only for the past quarter but more importantly looking forward.

The Week Ahead:

A major week for earnings reports. Week number one was huge but there isn't a shortage of important stocks reporting this week. Some of the big ones are Aapl on Tuesday along with Cat, Fcx, Btu, Mrk, Utx, Lmt, Yhoo, Gild, Unh and Amd. Monday has Txn and Lm. Wednesday we see earnings from Ba, Genz, Wfc, Pfe, Ebay,Qcom and Ms. Thursday it continues with Bni, Unp, Mmm, T, Ups, Nue, Cme, Dhr, Axp and Amzn. You get the idea. The market will be affected by these reports. If the majority are good, it'll help the Sp break over 956 but you know it won't be easy. We are very overbought on the 60 minute time frame charts and on stochastic's on the daily charts. The bears will fight 956 intensely. If we do clear, and i think we will in time, the bears will be forced to cover but we aren't there yet. Some selling to unwind things would be best for sure before a stronger move up is made. Interesting times. Let's see if the Sp can make the move this week.

Jack Steiman
www.TheInformedTrader.com

The Informed Trader is a site for self directed traders/investors. We offer Nightly Market Commentary, focused Long/Short Alerts, ETF/Sector Analysis, an Interactive Discussion Board with Intraday Stock/Market Analysis an IPO Corner and much more....

Copyright © 2009 Jack Steiman

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