Stuck in a Pattern

 | Sep 29, 2011 | 8:45 AM EDT  | Comments
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"What we call chaos is just patterns we haven't recognized. What we call random is just patterns we can't decipher. What we can't understand we call nonsense. What we can't read we call gibberish. There is no free will. There are no variables. There is only the inevitable."--Chuck Palahniuk

The market has been bouncing around in a trading range for nearly two months in a pattern selling off and testing the bottom, and then suddenly bouncing back on news that Greece is saved again or that progress has been made to end the banking and sovereign debt crisis in Europe.

The news out of Europe stops further downside just in time but no one really believes that the crisis is solved, so the upside remains contained and we eventually roll off again as optimism fades.

The pattern is playing out again this morning with news that Germany has approved funds for a bailout. There are still numerous steps to implement this plan, but this was an important preliminary one and it is bringing in buyers.

Typically, this sort of positive European news is good for a multiple-day run back to overhead resistance levels. The bears keep finding themselves leaning the wrong way as miserable action like yesterday's convinces them that the market is ready for the next major leg down. Then they have to scramble when news hits, and that causes bounces to gain energy.

In addition to the German news, the bulls have a little extra ammunition today as window dressing pressures peak. If money managers are hoping to bolster quarterly performance a little, today is the day to do it. Keep a close watch on fund favorites like Apple (AAPL), Chipotle (CMG) and Amazon (AMZN). If window dressing takes place, those sorts of stocks are likely to benefit.

Although the pattern of this trading range is obvious, it has not been an easy market for individual stock picking. It is all about the next headline, and when there is no news, we suffer from gloomy action like yesterday where we drip steadily lower with no buying interest.

This trading range is going to be resolved eventually. Hopefully, we'll have a little trending action, which gives us better trading. I've been inclined to look for a break to the downside as support weakens with each retest. A breakdown that gives us a new low for the year will wash out any residual bullishness and provide the foundation for a bottom.  With earnings season and the end of the year approaching, the timing for such a scenario works well.

Regardless of the overall technical picture of this market, the big problem for many traders, especially momentum traders, is the lack of leadership. There are no strong sectors, and trying to find strong charts is nearly impossible. It isn't possible to have much trust since the action has been so choppy and so lacking in any real buying interest.

The indices have overstated the strength to some degree since the best stocks in the market have tended to be a few of the big-cap names like AAPL that dominate. The average small-cap is buried in a bear market that shows few signs of bottoming.

European news and window dressing favor the bulls today, but the market is struggling to avoid a breakdown. No one is too trusting of a bounce, and the bears fear the next headline proclaiming a European solution.

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