Submitted by Mark Hanna
Courtesy of MarketMontage. View original post here.
Yesterday’s late day rally still has me shaking my head a bit this morning. While someone who just looked at the closing print of the day might have thought it to be a quiet day, there was actually a lot of importance to those 25 minutes or so. As you can see in the chart below this market has been extraordinarily strong in that it has held the 10 day moving average since the December 20th low. Normally you see that sort of action in individual stocks, not necessarily the index. Even very strong markets usually see a pullback or two to the 20 day to shake out a few people and then continue back upward. Not this market – it has happened only once (Jan 30th and Jan 31st) and that was intraday, not on a closing price basis.
[click to enlarge]
Yesterday around 3:30 PM looked like the break was finally going to hit – breadth was awful, a lot of leadership stocks had reversed (sans Apple), and the S&P 500 was breaking down below the 10 day moving average, and looking to close on the lows. Contrast this to the selling last week which was almost always in the morning, with the indexes closing near the highs of the day. Then that magical buy order came in and rammed a Valentine’s rose down the throat of bears.
Of course, adding insult to injury the higher this market goes without a break, the more the risk averse get wary. One way to continue to be long but cautious is to tighten up your stop losses. However, days like yesterday puncture that strategy as you see your stop losses on some positions get hit, and then bids lifted with the general index in that closing 25 minute rush. Which, if you wish to continue partaking in party time, means you need to re-enter at higher and less advantageous prices.
With all that said, while the market has been teflon to the downside it really is not making much progress to the upside either since around January 20th. You can see 2 purple boxes I created in the chart. The S&P 500 based (a much needed rest after a hectic run from the start of the year) from about two and a half weeks in latter January until the jobs report a week and a half ago Friday. Then we had a “gap and go” rally on that one Friday, and from there – a new box, this one even tighter. So almost the entirety of the advance in the index since January 20th or so has been that one Friday. (the NASDAQ is stronger than the S&P 500 as Apple is carrying the world on its back lately) This second consolidation has helped alleviate slightly the very overbought conditions in a lot of secondary indicators … now they are just “quite” overbought. I threw RSI on the chart above just as one example – again usually 70 is a good ‘ceiling’, but we’ve been at or above for weeks; really aside for 4-5 sessions we’ve been at that level since mid January. But markets generally remain overbought far longer than oversold, so it’s much more difficult to time tops versus bottoms IMO.
As we look to the right of the chart you see two orange lines, one straight and one diagonal. The former is one of the peaks of 2011 (the other being around 1370), and the latter is a series of higher lows on the S&P 500 over the past month. Obviously they are converging and the market is ping ponging within this area. So the noose is tightening (but on whom?) – and we should see a move soon out over the top or through the bottom.
Again the intermediate term outlook has improved (and has been the case since early January) – the question now is do we continue this move with only sideway consolidations or will the “buy every dip” crowd continue to win, each and every time, without dropping a bead of sweat? Usually the market does not reward the EXACT same action repeatedly but thus far in 2012 buying every dip hasn’t created 1 losing moment.
Addendum: As I wrote this last night S&P futures surged about 7 points as China said they are ‘willing’ to help Europe, and we look to open above the triangle this AM.
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Any securities mentioned on this page are not held by the author in his personal portfolio. Securities mentioned may or may not be held by the author in the mutual fund he manages, the Paladin Long Short Fund (PALFX). For a list of the aforementioned fund’s holdings at the end of the prior quarter, visit the Paladin Funds website at http://www.paladinfunds.com/holdings/blog
