The Picture Blurs

 | Jun 27, 2013 | 4:35 PM EDT
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The bulls continued to build a very good bounce but the bears won't have much difficulty finding flaws in the action. Most notably, volume has been declining as we go higher, but who takes volume seriously these days?

The bulk of the gains have come overnight while we have had fairly narrow intraday ranges and soft closes. That isn't particularly negative but it does highlight how challenging it has been for buyers seeking good entry points.

The action today was probably boosted to some extent by window-dressing, which doesn't make the gains any less real but it does set the stage for a potential reversal on the last day of the quarter. Often, we will see the big window-dressing move on the second to last day of the quarter and then actual profit-taking on the last day.

Fed talk also aided the bulls but there is no way you can look at the SPDR S&P 500 (SPY) chart and say it is a bullish setup. We have a classic low-volume, oversold bounce into resistance at the 50-day simple moving average. This is the place where you'd normally look for profit-taking and for bears to remount shorts. Of course, the typical pattern of this market has been to keep running, which drives everyone crazy, other than the fully invested permabulls, but you have to be aware that it could easily happen again.

Remember that tomorrow we have the Russell index rebalancing, which will give us a huge surge in volume when all the additions and deletions occur at the close. It confuses the overall picture quite a bit but probably adds a positive bias to the action.

Have a good evening. I'll see you tomorrow.

June 27, 2013 | 1:24 PM EDT

A Real Head-Scratcher

  • The bounce feels too late to buy but too strong to short.

The indices are off their highs but still up substantially on strong breadth. Market players are a bit perplexed as many stocks are extended off recent lows but there are still no signs this bounce is ending. It feels too late to buy but too strong to short.

I'd really like to be a buyer but I'm not seeing much, so I've done a little profit-taking instead in names like Canadian Solar (CSIQ), Renewable Energy (REGI) and Albany Molecular Research (AMRI).

Today is likely the peak of end-of-quarter window-dressing and bears are standing aside until tomorrow to roll the market back over.

The other thing helping the bulls is all the Fed talk. The odd thing is that Fed members are attempting to clarify what Ben Bernanke said, even though he was clear to begin with. What the Fed members are really addressing is the market reaction to the comments rather than the comments themselves. The logic seems to be that the market shouldn't have sold off so hard if it had really understood what Bernanke was saying.

The bulls are making another push. If you are looking to short this market, at least wait until tomorrow before deciding.

June 27, 2013 | 10:25 AM EDT

Are You Having a Laugh?

  • The joke's on anyone who thought another bounce couldn't happen.

The market is laughing at all those poor folks who thought it couldn't possibly have another V-shaped recovery. I have to admit, I've been skeptical since the main cause of the weakness has been rising interest rates. That is the one thing that could spook the bulls, but the Fed has been working hard to talk things back up and that has given the bulls fuel.

The S&P 500 is still working to recover the 50-day simple moving average, but the other indices are starting to cut through overhead resistance without much of a problem. We have extremely strong breadth again at better than 5:1 positive and all major sectors are green.

If you look at the charts and use traditional technical analysis, you would expect the market to run into problems soon. But more often than not, these levels have not mattered once a bounce starts. That's why I keep talking about the V-shaped bounces and how they have become the rule rather than the exception.

Canadian Solar (CSIQ) is a Shark Technical Buy this morning and is breaking to a new high on very good volume. I could use more inventory, but the dilemma is that these V-shaped moves destroy the best entry points and you have to be willing to chase.

June 27, 2013 | 8:28 AM EDT

Advantage: Bulls

  • They are looking for this bounce to keep going.

Know your enemy and know yourself and you can fight a hundred battles without disaster. --Sun Tzu

The indices bounced quite nicely after a panicky selloff Tuesday and the big question now is whether it can continue as we start to run into technical overhead.

The bull's argument is that the market overreacted to Fed chief Ben Bernanke's comments about tapering and never should have sold off like it did in the first place. Fed members have dropped a number of hints that the market may have misinterpreted the comments. Yesterday, one of the most hawkish members of the Fed, Jeff Lacker, said, "We're not anywhere near decreasing the balance sheet yet."

The bears' response is that there is much more going on than just Fed jawboning. The bond market is making it clear that higher rates are coming and the recent issues in China and Japan make it clear that there are plenty of problems lurking under the surface.

There are always good bullish and bearish arguments, so we need to stay objective and focus primarily on the price action. Unfortunately, that isn't as easy as it sounds. Over the last four years, this market has had a tendency to ignore standard technical setups. If you tended to look for failed bounces, you have likely been on the wrong side of this market.

We have a classic bearish technical setup but the bulls are ready to ignore it and they are looking for this bounce to keep going. They expect the bears to be squeezed and the cautious bulls to be sucked back in as we continue to run.

This market has broken down from the highs in May and will have a number of bounce attempts and failures before it finds support and turns back up. Usually, we have trapped bulls and energized bears when there is a collapse like we saw last week. These folks look to sell into strength and when that is combined with less positive sentiment, it produces failed bounces.

That dynamic has not worked for several reasons, probably due in part to computerized trading, high levels of liquidity and the fact that the pattern of action has been different for so long. It doesn't seem logical from an emotional standpoint but we'd be foolish to think that the market can't possibly pull off another V-shaped move.

In the short term, a number of things favor the bulls. First, the second quarter is ending and there will be window-dressing pressure. We also have the Russell index rebalancing that will require quite a few stocks be bought by index funds. Most important, the news flow seems to have calmed down and the dovish forces are gaining traction. We have to continue to watch the action in bonds but the emotional response to Bernanke is quickly fading.

The biggest negative is that the indices have very bearish technical patterns. We have had a classic low-volume, oversold bounce. We can still run a bit before we hit major technical overhead but it is hard to imagine that we don't have some sort of pause at a minimum as recent buyers flip and the bears give it another go.

This market has favored a bullish bias when conditions are like that and that is what I'm going to do. If it falters, I'm hitting the eject button quickly, but fighting a bounce has not been the way to make money for a very long time.

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