After enduring the Monday madness of the S&P down grade and a 150 point decline in the Dow, this morning the Dow gaped up 150 Dow points. However, it is a little harder to understand the emotion/rationale/reason for today's big rally. The talking heads are explaining that good earnings are the reason........somehow, a few companies beating earnings expectations, which of course is based on old history, can't compare to the potential downgrade by S&P of the U.S. credit rating, a looming future negative.
What else is going in the the world? Greece is thought to be on the verge of default, Spain just accepted bids at 5.6i% for 10 year notes, Finland just elected a new government that is completely opposed to any more Euro bank bailouts, and Portugal has decided that it needs a bailout after all. Of course, with all of that good news, the Euro is again testing the resistance 1.455.
Of course, The U.S. dollar is about to break the 74.5 level, on its way to (pick a number). With the recent revisions to 1st quarter GDP now down to 1.75 to 2.25% and 2nd quarter expectations also being revised lower to a consensus 2.25%, it seems the market is responding to good news on current earnings, with out doing what the market is thought to do best... reflect future expectations looking ahead 6 months. At least, that is what I was always taught by analysts at the firms where I worked.
As you know, the Proprietary Momentum Changes indicators generated a new Sell signal 4/12, but I did not like that side of the market for a number of reasons, especially since the change was so unexpected, and the fact that it occurred at a time where my timing signals were looking for the market to move higher. As my old friend Robb used to say, it felt like "Whip Saw City". And technically, the charts did not look that bearish. So I had no recommendations.
As you also know, I have become very concerned about the long side as well. I think we are in a trading zone, bounded by 1334 and 1250. The Q's, the SPY and the IWM have formed what are potentially powerful inverted head and shoulders patterns, while longer term charts of the same indexes present major resistance at levels just a little higher here. In fact, the long term resistance is located at the same prices as the neck of the inverted head and shoulders patterns. So I want to see what happens at 1334.. or at 1250 (there is a higher resistance level around 1295 that is also important). If the momentum change indicators are bullish if the market breaks above 1334, it will be time to get long...however, if the momentum change indicators at that time are bearish, it will be time to get short.
Having said all that, this morning the Momentum Change indicators for the SPY and the Q's have in fact flipped bullish, and if the market stays strong through the close, I will consider the momentum to be Bullish. But even with a new Buy signal from the SPY, I will not make any trades until we see what happens around 1334. The market I think is making a top, and the volatility we have been seeing since February is the kind of action that has typically signaled market tops. This is not to say that the market can't move higher... just that I feel risk, on either side of the market is very high, and I like to trade the low risk, high reward set-ups. Right now, I don't think that condition exists in the market.
Best to Your Trading!
Bill
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