Despair is most often the offspring of ill-preparedness. --Don Williams Jr.
Market volatility has increased greatly in the second quarter, but while the bulls have not been able to regain the upside momentum they enjoyed for so long, they haven't given up either. After two big bounce attempts in the past week we have had some quick selling, but not enough to turn the trend to the downside. We are still holding above key resistance but in a precarious position as earnings roll out and news flows from Europe.
One interesting phenomenon I've noted lately is the inclination of the market to continue to move all day in the same direction that it opened. SentimenTrader.com states that the SPDR Dow Jones Industrial Average (DIA) "has closed in the same direction as it opened for 12 straight days, meaning we haven't had any intraday reversals for nearly three weeks straight." According to the site, this has occurred only six other times since 1998.
As I've been discussing, I attribute this action to high-frequency computerized trading, which tends to employ algorithms designed to exploit poorly positioned market players. When the market is seeing directional changes day-to-day, the best way to create movement is to push in the opposite direction all day and cause people to reassess their market bias. After a big down day, people will have a more negative bias, so if you push up the next day and don't relent, you are likely to cause chasing and short squeezes, which generates more momentum and can create good trading for the computers that ride the intraday trend.
While it is important to make note of intraday inclinations of the indices so we can trade them, we don't want to lose sight of the bigger technical picture, which is problematic. We had the breakdown in early April, a first bounce attempt last week that failed, and then a second bounce attempt Tuesday, which was turned back yesterday but did not completely fail. Do we now turn back up and resume the first-quarter uptrend, or do we continue to probe to the downside?
This morning the market is trying to regain its footing in an attempt to build on Tuesday's big move. The Spanish bond auction that was on the minds of many is having little impact, but the good news is that the reaction to earnings is a bit more upbeat. F5 Networks (FFIV) reversed sharply after selling off initially last night, and eBay (EBAY), Morgan Stanley (MS) and Bank of America (BAC) are seeing good reactions this morning; however, Qualcomm (QCOM) is a problem. The reaction to earnings is better, but still not great.
So far, earnings have not been particularly well received, and we'll see how positive reactions this morning hold up, but the numbers have not been bad overall. The problem is that expectations may have been too high after the market ran straight up in the first quarter of the year.
The biggest obstacle for the bulls is mounting worries about Europe. While the Spanish bond auction wasn't a disaster, it wasn't great either. The likelihood of continued European sovereign debt problems is quite high and it isn't going to take much for them to pressure the market. We are seeing this as I write, and it has the capacity to trump earnings, which are nothing particularly special. Throw in concerns about the French election this weekend and Europe is likely to be the main driving force.
As far as I'm concerned, the overall technical picture has a bearish bias to it and I'm respecting that fact. I'm still looking to trade the long side as there still seems to be some decent stock-picking, but I'm inclined to lean on the indices and look for a retest of the recent lows.
We'll see what happens after weekly unemployment claims, but I'll be mentally ready to deal with some downside action.
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