Looks Like an Inflection Point

 | Aug 30, 2011 | 8:33 AM EDT
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If there is no struggle, there is no progress. -- Frederick Douglass

As we kick off the morning with some selling pressure the question is whether our recent relief rally is about to fizzle or are we still in the early stages of a lasting turn to the upside? 

The big move Monday, on extremely positive breadth, caught many folks by surprise. But there were plenty of doubts in the air as well. The skeptics pointed out the light volume and the lack of positive news flow as evidence that there was a lack of real buying. They chalked up much of the action to end-of-the-month window dressing and computerized trading. 

Maybe that is just bearish spin, but they do have some legitimate points. With many market players absent, it was almost holiday-type trading where the bulls dominate the action and run up many small-caps. The small-caps led the day yesterday, which is what tends to occur when the bears stand aside and the action is thin. It can make for some very nice moves, but it is not the sort of action that is supportive of sustained upside momentum.   

Technically, the most interesting thing about the action was that we managed to trade above the interim highs we hit a couple weeks ago. We broke out of the recent trading range, but it is almost a classic bull-trap setup as it was just enough to trigger buy stops that were set right at the breakout point. It was not a very convincing move but probably good enough to suck in some buyers who feared that the market was about to run away without them. Not all breakouts are created equal and this one definitely lacked vigor.

A little backing and filling at this point would be a good setup for a more convincing breakout move but the news flow might make things difficult at this point. We had a bit of a respite Monday, but the sovereign debt issues in Europe have not gone away and we have a flood of economic data this week which is going to impact the mood. Consumer Sentiment is due out at 10 am ET and should be a market mover.

The danger that the market is going to roll back over is quite high here, but at least we have developed some underlying support over the last couple weeks.  Some pullbacks here would actually be quite productive as far as helping to create some better chart setups, but if you have caught some recent gains you will want to tighten things up and not let them slip away.

While the action Monday had the feel of another one of those v-shaped moves that have saved this market so often in the last couple years, we have very different conditions in place now since the Fed is not pumping the liquidity like it did when the quantitative easing programs were in place. In fact, the market is struggling with a tremendous amount of outflows recently and there is obviously a recent downturn in the economy that is having an impact.

The most important thing you can do right now is to make sure you protect your gains and be ready for some downside. There are some reasons to be bullish, but this market still has some major obstacles to deal with and the action is likely to be choppy as we sort out the macroeconomic picture.

Keep an eye on gold today. It looks ready to regain its luster as European struggles remerge.

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