This Leg of the Trip is Over, Let's Gas Up

I reported yesterday morning to my Google Group that I thought the markets may retract a bit for the next few days, and that seems to be bearing out (no pun intended).

If you're a chartist, check out the MACD on any of the major indexes, as it is shifting direction downward, this is the supply/demand trend in transition. This will aid in resetting the oscillators like the RSI and Stokes, and ratchet up the pessimism a bit.

AIG is going to help this transition along by reporting much worse than expected news, probably stopping the financials resurgence dead in their tracks. How does a company raise dividends when they know their write downs are exploding? On the flip side, retail is rising against the tide, interesting.

The Naz should be the benefactor of good support in the 2390-2400 range. I think we'll see some more selling today and into Monday, this will be a weight on AAPL going higher. So I would consider trimming positions on strength. That doesn't mean take everything off the table.

If you want to preserve capital, then preserve capital, if you are more of a risk player or much longer term and can weather the dips, then do that. The fact is, that the Bears have the upper hand on the Bulls right now, and expect them to exercise their will. I'm personally holding my AAPL position, if there's an intra-day move towards resistance, which appears to be at 188, then you might consider locking in profits.

I'm Free! And Freedom Tastes of Reality!

Who would have thunk the market would break free with such vengeance as it did yesterday? The Bulls launched the Nasdaq to highs it hasn't seen in a long time, breaking through the long-term downtrend, and in a very big way. So now, the resistance that we've been fighting for the past weeks (2430 on the Naz) is now huge support.

Now for a word of caution before you get too giddy. This is a strong buying signal, however, that doesn't mean the market is going to shoot to the moon. Oh no! In fact, you can expect it to test that support, how else will the market know it's for real? So, before you start spending like a drunken sailor (no offense to drunken sailors), look before you leap.

As the market was rising yesterday, and I sat in stunned silence, I was trying to make sense of it. Normally on breakouts, you get volume shooting through the roof. But that wasn't so. I always preach that the key indicators for determining future directions are a confluence of price, volume, and momentum. Volume was pretty good overall, but in some corners it didn't quite jive. Look at AAPL, it rose 3%, but on 10 million fewer shares than on average. It was the same story in all corners of the market.

Weird? Well not so weird. There is one other indicator that you've probably seen if you're the parent of a child with a stubborn fixation on something. That is sentiment. The market simply said, I've had my eye on that cookie jar for so long, and every time I reach for it, you slap my hand. Well, no more Mom, those cookies are mine, and there's nothing you can do about it! So, we took the cookies. Let's hope we don't over indulge ourselves. Ever eat a whole package of cookies? Later you pay for it, in a most unpleasant way.

So, now for the technical details. On the Naz, advancers led decliners 20 to 9, and volume on those advancers relative to decliners was very good, on very good overall volume of 2.3 billion shares. In other words, Advancers tipped the scales like a one ton Bull, while the Decliners were vying for a Biggest Loser bear hug. This is confirmation of a breakout in my book. Let's hope we can maintain it.

The Morning After

Futures are down this morning, but not severely. GM looks up, but that's to be expected after their upbeat earnings report. Apple will likely open a little higher this morning. There seems to be an upswell of small investors that want it higher, while big money is sitting on the sidelines.

The Fed gave the market exactly what they wanted, A small rate cut and a neutral stance going forward. But even so, the market sold the news, with the Dow losing 117 points in 5 minutes, and AAPL dropping a bit over 2%. AAPL recovered some in after hours trading. The Dow had briefly touched 13,000. That's a level that hasn't been seen for a while!

The Naz was poised to break out of critical resistance at 2430, the long term downtrend line. But the selloff squashed any hope of achieving that. And I'm not sure we'll see it happen this week. The market needs to find it's footing here, digest what the Fed said, and fend off a slew of market reports today, including Jobless claims (tomorrow is non-farm Payrolls).

I can't see taking any longs today, no clear entry points.

Hey Ben, We're in a Tight Spot

Last night I got to thinking about the Fed's announcement today. By the way, Ben and company speak at 2:15 PM EST. And after a little what if analysis, I came to the conclusion that these guys are are in a tight spot. Think about it; the market wants Ben and company to cut rates by 25 basis points, but more importantly, they want to hear that the Fed is going to be a hawk on inflation going forward.

Now, if they cut 25 points, I believe the market is going to sell the news. The dollar will remain weak, and inflation will ramble on. Man, the prices at the pump, and at that food market are really putting pressure on the consumer.

If the fed cut's 50 basis points, will that help the market? Sure the housing market will like that, but it may completely destroy the dollar. And with the dollar tied to oil, this may reverse it's recent decline, and launch the cost of delivering products to consumers. It may help exports, but you can't devalue the dollar to get us out of this predicament. The market will be stunned at first, realize the predicament and sell off.

If they don't cut at all, then the message will be that we've got runaway inflation. Nobody will take that news kindly, and the market will sell off. Man, we're in a tight spot!

Zach's Weekend Roundup

This was a great week to be an AAPL investor and a solid week for the markets. The Dow, S&P 500 and the Naz all broke through their key resistances, with a tremendous surge on Friday, and put in 3 month highs! It was an amazing show of strength from the Bulls, and the Bears appeared to take a cold shower. Even in the face of horrible reports and huge write downs from the financials, the markets just shrugged it off and sent Merrill Lynch (ME) and Citigroup (C) higher. Obviously the market felt that they have already baked in the their weakness from as far back as Q3, and are looking forward to a more positive year coming.

The inverse head and shoulder patterns played out, fronted by the huge positive divergences that we have been following since mid February. Every time the Bears tried to break up this momentum, they came up dry with weak volume. This was in stark contrast to the Bull rallies, which were generally very strong.

So, now we've broken through the necklines, it's time to establish these as solid support and use it to launch a new upward trend. Looks like the drag of the financial and housing markets weren't enough to bring the rest of the economy into negative growth. I believe a lot of economists are going to have to reconsider if we ever were in recession. Sure we started to stall, with 0.6% growth in Q4 and 1% growth in Q1, but it looks like we'll end up with 1% or slightly better in Q2.

Bully, bully, bully! Agriculture, Oil and Tech have been big winners in the past couple of weeks, with energy close behind. And Transports did well despite the spike in Oil. The Bull/Bear spread on the Investors Intelligence Survey is still inverted, which is a contrairian bullish indicator. And the put/call ratio was down to 1.04 but remains above 1.0, which should still be considered a contrairian bullish indicator as well.

The key for this week, as I said earlier, is to turn the critical levels that were resistance on the Dow, S&P and Naz, into support. Those levels are: Dow (12,880), S&P 500 (1404), and the Naz (2440).

Take Five, We Need a Reality Check

I want you to sit back, clear your mind, and reflect on where we are, how we got here, and what keeps us going. Then, I want you to play the following media montage in your mind.

The montage starts with negative earnings and poor outlooks from companies across every sector, jobless claims and unemployment rates rising, housing markets in free fall, new home sales down affecting thousands of builders, sub-prime mortgage crisis, accelerating foreclosures, a dollar that is in free fall while the fed pumps never ending streams of money into the economy, growing trade deficits hindering our ability to compete, oil hitting all time highs, gas prices that make me wish I had bought the hybrid version of the Toyota Highlander instead of the normally aspirated V6 (sweet ride). The jump in gas prices have raised the cost of transportation, which in turn inflates the cost of virtually every product on the store shelves.

Is that a clear enough image for you?

Yet through all this AAPL and the markets want to go higher, depressing story after story is shrugged off by the market. And the irony is that we're at the cusp of an inverse head and shoulders breakout, one of the most reliable Bull patterns.

It's gotta make you pause. Can we do it? Or are we just another bad news story away from a complete reversal and market colapse? This is our reality. A classic struggle between the Bulls and Bears, cold steel rain and green fields, good vs evil, coke or pepsi, uh, err...

Anyway, I just wanted to illustrate that in order for us to navigate this market, and making money, we need to keep things in perspective. Don't let a little run-up cloud your vision and affect your judgement. I've said it before in several recent posts, I'll say it again so that it's clear and unambiguous; our NUMBER ONE priority is CAPITAL PRESERVATION; our number two objective is making a decent return.

So, you have to respect where we've been, how we got here, and what the challenges are ahead of us. It is tenuous, but we must rely on our good senses, experience and willingness to accept the truth. Therefore, this situation requires that we stay mainly in cash, let the Bulls and Bears fight the good fight, and when they're done, they will have illuminated the path that we should take.

Enough said.
-zach bass