Google Powers a Bounce

 | Oct 14, 2011 | 8:52 AM EDT  | Comments
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"People seem to enjoy things more when they know a lot of other people have been left out of the pleasure." --Russell Baker

When markets go straight up, like they did the past week, it tends to create a large supply of underinvested bulls anxious to buy pullbacks. The methodology of many market players doesn't allow them to chase strength, so they wait for downside action before they buy. Though it's better to chase things higher when they start to run, stylistically they are committed to buying weakness and will do so automatically, even if the dips are minor and the market are still wildly overbought.

Thursday's action was a good example of how dip buying tends to manifest itself. There was a bit of panic at the open and the buyers hesitated at first, but we held steady all morning and that was all they needed to inch in later in the day and produce a strong finish. The indices were mixed and breadth negative, but given how extended we were, it is impressive that we held up so well and the selling was so contained.

This morning Google (GOOG) is helping to keep the quick bounce going. GOOG generally doesn't create much broad market sympathy with its report, but this morning there is hope once again for another Europe-is-saved rally, and the dip buyers who weren't fast enough yesterday are worried this market might run away without them. It was a solid report and that is helping the mood ahead of the reports to come in the next few weeks.

From a trading standpoint, it would be much easier if the market pulled back deeper and consolidated a bit before turning back up, but the market never wants to make things easy. Too many market players are looking for exactly that sort of action, but they are so tired of being left behind when the market runs straight up that they never give it time to develop.

An added complexity is the start of earnings season. Tuesday night in particular will be interesting when Apple (AAPL) and Intel (INTC) report. INTC's earnings have often marked a turning point in the market action, and AAPL is probably the most important stock in the market.

After the run-up we've had this week, conditions are good for a sell-the-news reaction if reports aren't extremely good, but as we are seeing this morning from GOOG, extended stocks can keep on running on solid numbers. We'll see how well GOOG holds its gains, but I'd be surprised if it doesn't have very solid underlying support.

The biggest challenge for technical traders is that the action hasn't helped to create solid, buyable charts. It has been the primary dilemma of this market since the low in March 2009 and it doesn't look like it is going to change today. If you want to put money to work, you need to force it. Many folks are doing just that, which is why the charts never have time to develop well.

Watch for the bears to fade the gap-up open, but I expect the dip buyers to provide plenty of support. Unless we have some surprise negative news, I don't expect any major downside in the near term.

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