Sunday, November 25, 2012

We Need a Rest, But Is That Too Obvious?

The Thanksgiving tradition of squeezing the market higher arrived in full force last week, as the market followed through on last Friday's reversal day and has moved up five straight days now.  This Friday's action was most impressive as it took the S&P and Nasdaq above some key downtrend lines. 

  S&P 500
Russell 2000

Unfortunately, I did miss out on the action last week as I tried some TNA on both the 14th and 15th but was stopped out both times and then didn't get back in for some reason.  For whatever reason, I am not good at all trading v-bottoms, and that is basically what we have here (if indeed this is a bottom).  IBD did put the market into rally mode on Friday, basing their decision on the fact that volume would have been heavier if the market was in session for a normal period of time rather than a half-day.   Volume is a big concern here but being that it was a holiday week, it is hard to judge.  From my perspective, last week just "felt" like short covering rather than pure accumulation from the big boys, but maybe I am just mad I missed it.

Although I hope the past week was just the start of a strong rally into the end of the year, I do have my doubts.  As I did my scans this week, I just didn't see much at all in the way of nice bullish charts.  If you would ask me "who are the leaders of this market?", I really don't know what I would tell you.   I am putting some charts below but most of these are very thin or under $10, and those are not typically what you would call "leaders" from a traditional perspective.   There are charts out there that were strong this week but are nowhere near a buy point and need to consolidate.

 All Charts from TC2000, Courtesy of Worden Brothers, Inc.

We are overbought on most measurements I use but not quite as extremely overbought as we were extremely oversold two weeks ago (if that makes sense).   I did find it interesting to see the T2106 (McClellan Oscillator) move straight up from -320 to +190 without any sort of pullback.  I ran a quick scan in TC2000 to show the number of times T2106 went up five days in a row over almost the last two years below and you can see the results below.   It only happened four previous times and each of those times did not compare to the overall move higher we've seen here over the past five sessions (some 500+ points on T2106).  Based on the last two years, a pullback of some kind seems likely.


Even with the aforementioned data points, it would not shock me at all if we squeeze higher next week without a rest. That might sound stupid based on the data, but I get the sense that everyone is seeing a market up five days in a row and very extended and everyone is thinking the same thing - "boy, could we use some rest."  Rarely does something obvious occur on Wall Street, so I am keeping my mind open going into this week.

Don't get me wrong - I would love to see a nice rest of three to four days where the market pulls back just slightly, mainly because the issue of lack of charts I am now seeing would be taken care of quickly.   This would be ideal.  There is little doubt too many charts are too extended right now to get involved heavily on the long side right now, but it is what it is.  Going forward, some rest this week would increase the chances of this "rally" being legitimate as well.  What everyone wants is rarely what everyone gets, however, so don't be surprised if we keep squeezing higher to frustrate the masses. 

My game plan for the week is to mainly stay on the sidelines until better buy points develop, but if I see any of the charts listed above trigger, I will consider them based on volume.  If you are still heavily long, congratulations, but you may want to selectively take profits if we continue to squeeze early in the week.  A pullback will take place at some point - it just might be at prices higher than where we are at currently.  Good luck this week.

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