Handicapping the Uptrend

 | Oct 25, 2011 | 9:05 AM EDT
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"Good decisions come from experience, and experience comes from bad decisions."--Unknown

How long do you stick with an uptrend? That has been the single-most vexing question of this market over the past couple of years. The easiest thing to do is to anticipate that a big, straight-up move is about to end. Unfortunately, the easy decision is usually the wrong decision, and the vast majority of market players are too quick to anticipate an end to an upside move.

It isn't surprising that so many market players tend to be too fast to believe that the market is about to roll back over. We typically have poor technical setups with overbought conditions on light volume and the news flow is quite problematic. Even earnings season has been mixed, but this market has acted as if it has no worries, especially since Europe is about to be saved.

It is never hard to make a bearish case against this market, which is probably a big part of the reason that it has a tendency to frustrate so many with sustained upside moves, even when conditions don't seem to favor it. The one thing you can say with certainty about this market is that it has caught many market players leaning the wrong way.

The challenge is the intense focus on the decision due tomorrow from the European Summit. That and the hope of some sort of meaningful solution have put a bid under the market recently.

The million-dollar question is whether the market has already anticipated the good news, or will there be a solution that will finally help put a floor under the European debt problems. That is what traders are pondering today, and we should see some pushing and shoving as they position for the news.

Technically, the market is set up very well for a sell-the-news reaction to Europe, but the underinvested bulls and the overly anticipatory bears have been easy and convenient short-squeeze fodder for the computers, which continue to push. The market is definitely due for some sort of consolidation soon, but if current trends prevail, it should continue to frustrate those who have been too fast to expect weakness.

What I have found to be the biggest challenge recently isn't just the lopsided nature of the V-shaped bounce, but the lack of any clear leadership. We have not had the very strong pockets of momentum that you usually see whenever we have a sustained move to the upside. There haven't been many themes or sectors exhibiting relative strength, and finding the charts remains a substantial challenge.

Today's challenge is balancing upside momentum against overbought conditions and the potential for a sell-the-news event out of Europe. It is a real balancing act and it will require extra vigilance. The risk of a rollover is high, but fighting momentum has been a very tough way to make money in this market.

We have mixed early action as earnings reports roll in. Netflix (NFLX), Cummins (CMI) and 3M (MMM) are giving the bears some ammunition.

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