Monday, October 10, 2011

Breadth Is Improving - What Bullish Action Would Look Like Here

As this market continues its non-stop climb up off the recent low, I have been stating via Twitter how many short setups I see and how I still am very hesitant to get bullish here.   Well, my main timing system (based on moving averages) did go to a "buy" today so I started looking for any signs tonight that this recent 5-day move may be different than the last few that just ended up being great short opportunities. 

What I found is that the breadth over the past five days has indeed been better than the two most recent rally attempts (starting on August 9 and then on August 23).   The chart below shows you the numbers.   Although this recent five day period is not that much better than August 23, it still impressed me enough that I am willing to give the bulls a shot here.

Notice I said a shot.   That's it.   I actually have two shorts on here (with tight stops) because I think a continued move higher without a consolidation is the very worst thing that could happen for the bulls.   Healthy markets don't form bottoms by moving straight up on ever decreasing volume.   As someone mentioned to me on Twitter today, it did happen back in September of 2010, but circumstances are a bit different from what I see.  Back then, the breadth signal turned immediately (September 1 to be exact), and the decline before that move was calmer and allowed more bases to set up for a large move up.   Right now, all that can be seen are v-shaped cups and bear flags which is not what you want to see. 
September 2010
Charts from TC2000, Courtesy of Worden Brothers, Inc.

I showed quite a few potential winners in the weekend video, with the caveat that I would only be buying if the market pulls back and allows some flags to be formed from which to buy.   I am sticking by that gameplan.   The problem is that most people are thinking the same thing I am and that's not a good thing on Wall Street. 

It's very possible the market keeps moving higher here, but there is just nothing I see here with a good risk-reward at this point on the long side.  If we're lucky, the market will consolidate a bit and setup for a nice year-end rally.  If I had to guess however (and because many are hoping for the same thing I am), I bet we move up for a few more days on lower volume before crashing back down through the moving averages like the previous two times.   I hope I am wrong.   Either way, this is a tough point to be aggressive on either so, so trade accordingly.   Good luck. 

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