Big Banks May Slow a Larger Bear Move

 | Jun 07, 2013 | 8:30 AM EDT  | Comments
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The market has taken quite a beating over the past two weeks. This has been particularly nice for the shorts I've been sharing.

But as we head into the weekend most of the daily short strategies have already hit or surpassed typical target levels for this time frame and the market is once again beginning to shift gears. Nevertheless, this hasn't stopped the bears from jumping up and down with joy.

Looking back, it's easy to see why the bears are getting excited. This is the largest correction the market has had all year. In the context of the monthly time frame, however, it's insignificant. The major indices have been in a larger bull market since early 2009. A pullback lasting merely two weeks barely registers as a blip on the radar, and it is certainly not a confirmation of a larger trend reversal.

While I may be more than willing to play the swing trade strategies that have been developing so well on the short side recently, I'm not nearly as excited about taking a full-fledged bearish stance.

Is the market extended on the upside on the monthly time frame? "Yes!" Are we likely to see this latest bull run end this year? I'm still going with a "yes" here as well. Are we going to see the market continue to plummet in the month ahead? "Unlikely."

The pace of the overall rally in the market makes it probable that as the market corrects from the monthly trend extension, it will begin by doing so primarily through time. This will create wider swings on the daily and even the weekly time frame, but the odds are against it having a major impact on the monthly time frame over the next several months.

For one thing, it's difficult to imagine a larger bear market kicking off without the participation of the major financial institutions. While Goldman Sachs (GS), JP Morgan Chase (JPM), Citigroup (C), and even Bank of America (BAC) are among the major financials that are showing trend exhaustion on the monthly time frame, they are all forming buy strategies on the daily charts as we head into the end of the week.

Furthermore, none of these major financials participated in the larger market selloff to the same degree as the major indices. While the overall market is likely to bounce into next week, it is the financials that stand the highest odds of testing their prior highs first, as well as breaking them. JP Morgan and Goldman Sachs are my favorites for continued strength.

This strength comes with a limitation, however: In all four of these companies, the rally that has taken place over the past two months is the third wave up on the monthly time frame. This creates the trend exhaustion I referred to earlier. The momentum may still be in the favor of the financial bulls (and hence the overall market bulls) at the moment, but they will want to be monitoring price action closely for shifts in this momentum and the development of larger corrective patterns on the weekly time frame.

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