The Pause That Refreshes?

 | Oct 26, 2011 | 9:00 AM EDT  | Comments
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"It's better to be an optimist who is sometimes wrong than a pessimist who is always right."--Unknown

The market finally corrected on Tuesday and now the big question is whether this was a pause that refreshes or the start of a more severe correction.

We were due for a pullback after running straight up and through resistance on light volume, but this market has created a big supply of underinvested bulls and the question is whether they will be jumping in and looking to buy as prices soften.

Technically, we have finally broken out of the trading range that has been in place since early August and we have some decent underlying support in place, but this has been a very streaky market for months and when the trend shifts, we have had a tendency to gain traction in both directions. The dips turn into pullbacks and the bounces turn into uptrends, and if you don't change direction completely it is easy to be caught leaning the wrong way.

Earnings reports continue to come in mixed with Amazon (AMZN) joining IBM (IBM) and Apple (AAPL) with disappointing numbers, but the market hasn't been too concerned. There are some strong reports as well, but it hasn't been the best quarter for earnings.

What continues to be the driving force is the potential for debt-related news out of Europe. The European Union Summit is ongoing and there are dribs and drabs of news, but no formal announcement yet. This is likely to be the next major market catalyst. Even though we sold off Tuesday, the conditions are still ripe for a further sell-the-news reaction once some actual news hits.

I suspect that there is still uncertainty even when the EU does make some sort of announcement, which is in some ways positive for the bulls because we can continue to rally on new rumors that a new deal has been made and Europe is really saved this time.

Overall, I'm optimistic about the way the way things are unfolding. We became overbought after another one of those low-volume, V-shaped bounces, but if we correct a bit further and see the market focus shift away from Europe, it is a good setup for positive seasonality into the end of the year.

The biggest challenge I see is finding good long inventory. The charts have been very choppy and not developing in traditional fashion, which has made it tough to hold much unless you have a very high tolerance for volatility. Further pullbacks or some churning will go a long way in helping to create good entry points.

I'm sitting here with plenty of cash and I'm ready to buy. I'm going to be looking hard for places to put some capital, but until this European situation is a bit clearer, I'm not going to be moving too fast.

We have a decent open underway but Europe news is likely to hit soon.

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