Struggling to Find Entries

 | Oct 12, 2011 | 8:50 AM EDT  | Comments
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It is the direction and not the magnitude which is to be taken into consideration.
--Thomas Paine

It is a bit difficult to believe but we have yet another "Europe is saved" rally kicking in this morning. What is rather humorous is the headline from the Associated Press: "Markets Buoyed by Slovakia Revote Hopes." We never saw any big selloff on the failure of the first Slovakia vote in the first place and it was already quite clear that they would keep on voting until the measure is passed, so maybe the word "buoyed" is a bit of an overstatement.

There are other things going on in Europe that probably account for the optimism, but the end result is that we have a continuation of the recent upside momentum as optimism about a European solution builds.

Unfortunately the technical conditions are making it quite challenging even if you are bullish. The indices consolidated slightly yesterday but it wasn't enough to relieve the overbought and extended conditions. Once again we are seeing our old buddy, the "V"-shaped bounce.

I've written about "V"-shaped bounces dozens of times since the bottom in March 2009. It has been the one characteristic of the market that has changed the most since the crash of 2008. For a variety of reasons the market has had a much greater tendency to bounce straight up without any pullbacks or consolidation. It is not the sort of behavior that classic technical analysis tends to anticipate, but I believe that market conditions have been changed by things like high-frequency trading, ETFs, quantitative easing and the carry trade.

Regardless of the reasons for the frequency of this lopsided action, our job is to find a way to deal with it. It has been the most challenging aspect of the market for me for some time, because my bread and butter has always been "good" setups. The setups that I like the most simply don't develop when we never have any dips.

So what do you do when you are bullish but underinvested while the market is running away to the upside? Either you stay patient and be selective, or you do some chasing. I'm generally not a big fan of chasing, but there's something to be said for simply putting money to work even when the entries are not ideal.

Obviously when you chase strength you run the risk of being caught in a quick reversal, but if the market really is in a sustained uptrend you will eventually be bailed out. In fact, chasing with the intention of averaging in on pullbacks is probably a good way to put some money to work if you are feeling confident that the market has put in a solid low.

I wrote the other day that I was optimistic about the chances of a year-end rally as some good earnings reports roll out and we enter the seasonally most positive time of the year. Unfortunately the market has done nothing but go straight up since then, which has left many nascent bulls like myself woefully underinvested.

In her column this morning Helene Meisler discussed the potential for a head-and-shoulders bottom formation in the market. That really would be an ideal setup -- it would give us some sort of pullback as that right shoulder is formed -- but the big problem of this market for so long is that it never makes those entries easy.

I'm longer-term bullish but am struggling with the lack of entries after some very lopsided action. I'm not alone, which means the dip-buyers will be out there and may keep pullbacks shallow.

We'll see if the bears have any luck fading early strength today. They have been trying to catch a top for days now without much success, and the end result is they just keep the upside momentum going. We are still extended and in need of a rest, but that has been a signal to just keep on going. If we do dip there should be plenty of bulls looking to put some cash to work.

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