Tuesday, October 6, 2009

State of the Market - 10/6/09

We saw another up day on Wall Street today, as another fall in the U.S. dollar caused commodities and the markets overall to follow-through on yesterday's gains. The day started slightly higher, but the buying continued for about the first two hours of trading, with the markets topping out around 11:30. From there, they drifted a good deal lower off their highs, but did find some footing after 2:00 and bounced back up into the close. They still finished off their highs, but with decent sized gains for the second straight day. Volume was heavier that yesterday's putrid totals, but still appears to be less than the selling volumes we saw last week.

Technically, both the Nasdaq and S&P saw the immediate follow-through I was talking about yesterday and that is good for the bulls. Those two indices need to get above 2140 and 1070 respectively in order to avoid a lower high being put in here. If those levels are overtaken, I fully expect new highs overall to follow soon after. In terms of the S&P, a closer look shows that it has rallied right up to the bottom of the July-September uptrend line it broke through last Thursday. The highs around 1060 from today are short-term resistance over the next few days because of this. Often times when a trendline is broken, it is retested from the bottom before prices fall for real. That is a possibility here.

S&P 500

The reason I think that is a possibility is that I see the same thing when looking at the USO and XLF charts. Prices on both have rallied right up to the bottom of their former uptrend lines which were broken last week, although in this case these were uptrends starting in March, not July. If these levels, which are around $15.10 for the financials and $37 for crude oil (USO), are broken through, then I think the chances of a serious pullback still occuring are much, much less. In fact, I would not really consider it a possibility at all. As of now, however, the technical setups in these three charts show me that this market may turn down once again soon.

XLF
USO
All Charts from Telechart, Courtesy of Worden Brothers, Inc.

In a way, I think today is sort of a sad day because it illustrates very well that for the most part, this rally since March has directly correlated with a plunge in the U.S. dollar, and as such, it kind of takes away some of the luster off the gains, at least for me. Do higher stock prices in terms of a dollar that is worth less really mean anything? Whatever the case, the dollar looks very weak technically as it seems poised to test its recent lows very soon, and lower prices here would likely mean higher prices for stocks as has been the trend this year. The UUP chart is one main reason I am very hesistant to be bearish here.

I made no moves today as I didn't want to chase things - the time to buy was yesterday, as stocks like SCSS, CVGI, PCX, and BEXP all continued moves they started on Monday. Right now, I am still neutral overall and will try and let the individual setups lead me. There are a few short setups that would interest me if we falter soon, but not enough to be overly bearish. There are some long setups that look decent as well, but not an overwhelming amount. I think overall I will not be trying to force things here, especially as earnings season starts this week. I'll probably be getting a video out either tonight or tomorrow going over many of the issues discussed above so if you are interested, keep an eye out for that. Take care and good luck Wednesday.

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