Anticipation Frustration

 | Dec 02, 2011 | 8:35 AM EST  | Comments
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"We are ready for any unforeseen event that may or may not happen." --Dan Quayle

For the third time this week, the market was surprised by coordinated bailout action in Europe and we've had a big gap up. This time, it's the European Central Bank lending money through the International Monetary Fund that is causing the celebration.

I commented in my closing post last night that the prospects for more positive news out of Europe were quite high, as there are a number of meetings scheduled for this weekend. I just didn't expect it to hit this quickly. What makes it even harder for traders to navigate is that we are already overbought and badly in need of consolidation. Plenty of folks who were looking for consolidation are out of position again. I suspect the level of underperformance for many traders is at a record high this week.

One of my main discussion points recently has been the perverse nature of the technical action, particularly on upside moves. If you have anticipated that spikes and rallies would end quickly, you have been proven wrong time and again. What has worked is to go counter to the traditional wisdom when it comes to charts. Overbought stocks that are hitting resistance on light volume don't tend to roll over, as logic would suggest. They keep running and cause great frustration, which helps them to run even more. We have seen this same cycle numerous times in the last couple of years.

As I mentioned Wednesday, what really makes this market challenging is that all the movement is occurring overnight. With this morning's move, almost the entire gain this week of over 8% occurred overnight. To add to that difficulty, ZeroHedge says this morning that the S&P 500 has traveled more than 1234 points since May 1, but it is basically unchanged for the year. The market isn't supposed to be easy, but navigating this sort of action is particularly difficult.

We have the monthly jobs report, which is going to be another catalyst, but the big question to contemplate is how to play a market that has made such a giant move. We are even more overbought and hitting resistance at the 200-day simple moving average of the S&P 500 around 1208.

The market is almost too obvious a short here. Selling into the third spike up on positive news after a giant move with resistance looming is so painfully obvious that one has to wonder if this market will continue to do the opposite. Personally, I don't fight momentum like this, but the real dilemma is that it is extremely hard to buy, too.

There will be a lot of howling this morning from underinvested bulls like myself. We can't allow our frustration to cause us to be undisciplined, and we have to continue to dig for good entry points. One of the hardest things to deal with all year is that waiting for consolidation within an uptrend has proven to be a mistake. The market just goes straight up and never allows for easy entries. The dip buyers are constantly chasing, and then when they do finally have an opportunity to jump in, the dip turns out to be a reversal.

Although I don't see how we can do any aggressive buying on this open, I am maintaining my bullish bias. In fact, this creates even more performance anxiety and gives us even stronger underlying support. If you are waiting for this market to suddenly fall apart, it is likely to be a long wait.

It is not going to be easy, but the conditions and psychology continue to favor more upside since virtually no one saw this sort of action coming.

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