Jury Still out on Bullish Case

 | Jan 31, 2012 | 6:41 AM EST  | Comments
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XLF

So, they tried to take 'em down but they couldn't break 'em.

There were a lot of folks quite excited over the rebound. For my part, I will simply note that the channel for the S&P is still intact, the one for the DJIA is not. The Russell is still intact as well.

Let's revisit the chart of the Select Sector Financial SPDR (XLF) that we looked at last week, since it did break the uptrend line. You might recall that at the time I noted it is standard to break the line and rally back. I saw many folks noting that if we didn't break 1300 on the S&P on Monday it was bullish.

I wouldn't argue with that, but I would note there are two parts to that bullish view.  The first is for selling to dry up on the downside (that occurred Monday at 1300). The second is for the rebound to make progress. The jury is still out on that.

For example, what if XLF rallies to 14.20 and then turns down? Won't that look like a failed rally? If XLF can recapture itself back over the line then that would be impressive. So, for my part to make a judgment on one day of trading just because we didn't break is being very short-term in your thinking. 

There is another choice here: we just go sideways, unable to get up and over that resistance and unable to sell off. Oh boy, would that frustrate the majority!

We see the upcoming test for the XLF. The SOX has one too. It bounced off its uptrend line. The test for it will be if it can get over this 410-415 area that it has traded at for over a week. In fact, as you go through your charts I am sure you will note how many charts have churned or digested for the last week or so. Even stocks that popped seemed to give it right back.

The question is if they are churning at the highs or digesting their gains. I think the window remains open for us to have a pullback sometime in the next week or two, but I also recognize that there was very little selling when we did go down.

There was much chatter about the bonds as well. The yield on the 10-year Note came down to the 1.80% area and bounced. This level has held on the yield two previous times. I have drawn in an uptrend line that broke on the chart of the yield but just like with the charts above, we give them a chance to recapture the break.  If bond yields fail to recapture that line (around 1.85% and rising) in the next few days, then I would be able to get a target under 1.70% on this move.

The bulls will say that's bullish for stocks as folks chase yield in stocks. The bears would wonder why oh why the yields are so low if everything is so good. I will just watch the lines and see if any of them can be recaptured.

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