Monday, July 6, 2009

State of the Market - 7/6/09

We saw a slow and rather sluggish day on Wall Street today, as stocks headed lower early on but managed to bounce back to a mixed close by the end of trading. After opening lower, stocks rose slightly the first thirty minutes of trading, but around 10:00, they fell pretty hard for about an hour, taking both the Nasdaq and S&P down to key support. That support did hold, and it was a slow grind higher for the rest of the session. Volume was higher compared to the anemice pre-holiday volume we saw last Thursday.

Technically, I pointed out in the video last night that the 887-888 numbers on the S&P would be very important as well as the 1770-1774 area on the Nasdaq. Those levels were tested almost to the exact number this morning - S&P got as low as 886 but the Nasdaq's low was 1770 - and for now have held. It wasn't that impressive of a showing by the bulls considering how weak the bounce was, but they held it nonetheless. Upside resistance right now is between 910 and 913 on the S&P and 1809-1812 on the Nasdaq and I will be watching these closely. A break above them could mean a move back to 925-930 on the S&P, but I don't anticipate that right now. Obviously, after today, a break of the lows from today would be very, very, very bearish.

The financials via XLF also held support today, getting as low as $11.25 (key support is at $11.30) but closing above that near $11.50. That is good for the bulls in the short-term. Retailers and oil via RTH and OIH/XLE reversed higher during today's session and closed at their highs for the day. That is also bullish in the short-term. By the way, by short-term, I mean the next two or three days.

Unfortunately, I don't think today does anything for the more intermediate-term outlook for this market. We may bounce a bit more like I explained in the video last night, simply because I think the "forces" that have pushed this market up so quickly and so powerfully are not just going to give up like that, at least not in my opinion. I think they will fight here to prevent a meaningful correction from occuring as best they can. I don't think they can prevent it over time, but in the short-term they may be able to delay the inevitable a bit longer. That's why I said last night that I would rather short bounces here than short breakdowns. I didn't chase anything this morning and will wait for the right opportunity to get short. I still have a feeling (and it is just a hunch, nothing else) that this market may grind sideways a few more weeks, frustrating a lot of people on both sides, before falling in earnest. A clear break below today's lows would change my outlook.

Overall, I believe cash and a defensive posture is the best gameplan for this market. I would certainly not be looking at any longs here and will continue to look for shorts to play if the market does bounce a bit more. This is just a guess, but I think the market probably has two, maybe three little bounces (including this one) before it finally rolls over and the selling really begins. Watch to see if those bounces get weaker as they go along. That will be a clear sign that the bulls are weakening. As I've shown for the past two weeks, the bearish patterns are all over the place, showing that a top IS forming here. It's a process however and the big-time money to be made on shorts might be a week or two away - just remember that. Take care and good luck Tuesday. I'll be going golfing for the first time in about a year so I won't be around. But as always, feel free to leave comments or email me with questions.

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