Market Overview:
We get towards the top of our 6 week lateral bases and it looks like we'll finally break out. It's the exact same story when we get towards the bottom of our existing bases. Breakdown looks inevitable. It gets very emotional at both ends because the consequences of a breakout or breakdown are large. The market is likely to have quite a large move once we get a decisive break and thus the emotions get intense. The only problem is neither side is getting what they want and there's a good reason for that. There is a lot of good news from both the economic and earnings front. That's the bullish case. However, there has been a tremendous run up over the previous months before this lateral consolidation or range bound market took hold. This keeps the market more in pause mode. We can't really break it down because of the good news out there but we can't break it out because of the tired and mature nature of the move off the lows. We have a market, instead, that's catching its wind. Bottom line is we're moving sideways and that may be the case a lot longer than anyone would like. That's the markets job. To frustrate and make things tough. Get everyone to do something they know they shouldn't but can't help themselves from doing. That is, to buy too much or short too much out of boredom. Lateral markets are the absolute worst nightmare for traders. Once a trend is over, traders want more and more. They don't get it so they play more to try and "make up" what they feel they're missing. If you play more heavily, the whipsaw will force you out of plays one by one. There's no way around it. In lateral bases, light and slow is the ONLY way.
The one thing that makes this particular market extremely tough is the way money is moving around from place to place. The big money plays the financial's one day and then sells it. They then run to the transports, retail, etc. All over the place. One day to the next often doesn't seem to make sense or follow a particular pattern apparently in place. Ultimately the pattern does play out but from a long and winding road. It plays havoc on emotions. This is yet another reason not to get aggressive these types of markets. In an up trending or down trending market you don't see this type of behavior. It's far more consistent. A market being consistent is what makes traders happy.
The Macd's on the 60 minute charts still aren't looking ready for sustained upside action. It looks as if some type of test lower will be necessary for this market to get ready for something more sustainable to the up side. On this move up today we didn't see any impulsion from those short term chart Macd's. That's good in a way in that it will allow, or should allow, for more down side which will only help to bering the oscillators lower not only on the short term time frame charts but on the daily charts as well. The daily Macd's are still crossed bullish on the daily charts and from or at below the zero line. That normally plays out well for the bulls over time but of course, we don't that for sure yet.
The key in terms of longer term health is for the indexes, the major indexes, to hold on to their 50 day exponential moving averages on a hold. A small breach isn't a problem but a close below with force would signal there's trouble. The numbers are 1056 on the SP 500, 2094 on the Nasdaq and 9812 on the Dow. Anything in terms of selling above those levels is simply noise that can be bought. Just remember those levels and trade accordingly. If we close 1% or more below those levels on ALL 3 major indexes, there's trouble ahead for the bulls. Simple as that.
Sentiment:
This continues to be very favorable for the bulls as the bears continue to rock in. The AII survey says that bulls are lagging bears and that's a positive that can't be denied. As long as that holds up we should see all pullbacks get bought up because there are enough shorts covering to give the market fuel.
Sector Watch:
Strong move in most Sectors this week. The Aerospace, Chemical, Pharma, Restaurant, Retail and Technology areas were quite strong this week. Consumer Electronics were weak and the Financials and Oil areas were mostly flat. Gold continues to ascend out of its base and the US Dollar remained under pressure falling hard Friday. As long as the Dollar continues to erode look for equities to hold up in our bases with our bias for an upside move in time. Most foreign country ETF's continue to show good price action. The Shanghai/China market after forming a Handle is at a very important pivot seen in our 5th chart below. We've included a snapshot of the German DAX seen in our 6th chart below.
The Week Ahead:
We will see the market most likely stay in its newly defined range with the bulls trying to protect any pullback towards the 50 day exponential moving averages and the bears defending any move towards the 1101 area. It's just that time folks. Time to keep it very light. The market will make its intentions known in time. Slow and easy.
