Tuesday, February 26, 2008

State of the Market - 2/26/08

The day started out ominously as a high CPI inflation number and a lower than expected reading for Consumer Confidence caused a weak open. However, this weakness did not follow-through, and buyers stepped in to push the market higher through the rest of the morning. Things stayed positive for most of the rest of the day until around 2:50, when the markets started to sell off. I am sure many traders were expecting this, as late-day reversals have become the trend recently, but the weakness was fought off and the market managed to keep most of its gains for the day. Although the last hour looks rather ominous on a 5 minute chart, particularly on the Nasdaq, the fact that the indexes didn’t sell off into the close when they had every opportunity to do so if definitely bullish. Volume was also higher, another bullish sign.

I really don’t know how buyers are stepping up like this when the economic data we hear continues to be so awful, but as IBD pointed out last night, the market is a forward-looking mechanism, and we need to remember that.

“That said, the market tends to look ahead. Stocks have often rallied in times when the economy looked weak, including in the early 1990s.”

I have heard that things often look worst at the bottom, and although I still have my doubts we won’t see lower prices at some point in the near future, that saying looks awfully correct right now. The market is telling us that it wants to go higher here, and there is no reason to argue – it’s pointless anyway because it will do what it wants regardless what I or anyone else thinks. I said yesterday that although things are starting to look better, the real key will be if we get any follow-through on the indexes. It would have been very easy after the open for things to fall back into the trading ranges of the past two weeks given we had two strong days before this, but they didn’t. They did follow-through pretty well overall. So for now, being long looks like the right play. I don’t know how long things will go higher, or even if things will continue much higher, but to paraphrase Jesse Livermore, “there is only one side on Wall Street, and that is the correct side”. Right now, it seems that the correct side to be on is the bullish side. Hopefully, it continues. You can make a lot more money being long at the right time than you can being short at the right time.

Technically, the indexes still have a ton of overhead resistance to deal with, so expecting the market to just go straight up from here is naïve. I would expect a pullback soon, especially when looking at the charts of the S&P and Nasdaq. The key will be how much volume the pullback comes on. But it may take several attempts to get over the 1400 level on the S&P, so the coast isn't totally clear just yet.

S&P 500

Charts from Telechart2007, Courtesy of Worden Brothers, Inc.

I saw many more breakouts this morning from nice charts – CREE finally broke out, more stocks like CEL are setting up in possible bases. To prove this, I went through IBD’s stocks on the move around 2:00 and this is what I found:

DWSN – Too v-ish for me, not a good base.

ALOG – No real base here.

AXYS – Nice chart, reminds me of OI which has continued upward after a brief pullback

BKE – Cup with handle breakout on big volume, handle a little choppy but nice chart.

HOS – Breaking out of double bottom; I wouldn’t buy here – weak close - but nice chart.

PKX – Laggard stock, don’t buy.

IBM – Too big-cap for me, but this could be considered a double bottom breakout.

MTL – Major leader keeps chugging higher.

VIVO – Forming little cup, moneystream has already broken out.

AZO – Nothing worth looking at.

ATLS – Forming right side of cup base, needs to rest and form handle.

FCSX – Forming cup pattern, good fundamentals, watch to form handle.

TKC – Could be start of right side of cup pattern.

NEU – Way too extended, but a strong stock.

CTRP – Forming a cup pattern; I don’t like it though from Telechart indicators.

PWRD – Mentioned yesterday, didn’t like the close.

CEL – Looks like it could form a really nice cup pattern.

CPLA – Next

FMC – Breaking out, but has some divergences in chart.

When I did this last week, I saw hardly anything. Today, I see a lot more nice charts setting up or breaking out. A few like YTEC and PWRD did not exactly finish strong, which worries me a bit, but others like CREE and BKE look good. Things definitely are looking brighter for the time being. I still wouldn’t just run out and go on full margin buying anything you see, especially since we are up now three straight days in a row. In fact, waiting for some pullbacks may be a safer play right here. But overall things are looking good for a continuation of this rally, and that is fine with me. It is just important to still be careful - don’t lose discipline and go chasing things here. Good luck.

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