If I were to pick one chart that exemplifies the true potential for a runaway rally from here or a decent pullback (2% or more), it would be OEX (S&P 100)and the 670 level. This is why I posted Keene's OEX EW analysis the other day and I'm putting up my own chart once again. Every time we get near this important mark (61.8% 2000/2002) the market enters into distribution mode, see Jan 24th and Feb 5th. Are things changing? Thursday and Friday saw another pullback from 670, but bulls quickly caught the drop to 10 DMA and saved the day. We are still hovering below 670, after one brief headfake Wednesday but let price decide. If we breakout above 670, next stop is 673, but it could be a temporary respite and would signal a green light for a huge rally. Do not short such an event! If we lose Wednesday's low at 665.67, we will head down and test trendline support once again and if that breaks, the bull market is over. The chart is still in a solid uptrend and as all daytraders know, you can only get repealed at resistance so many time. There is nothing wrong with shorting resistance, just don't get greedy and be ready to flip to the long side on a pullback that holds or a breakout above. Traders who do not have quick hands (or the time to be around their monitors) should stick to buying pullbacks as long as the uptrend remains in place. We could still get a wild 2% correction even with the current cautious sentiment level (only because the VIX is ready for a bounce and those bearish divergences are all over the place), but until ISEE closes above 200, I consider short plays to be swing trades only. Use futures and book profits at support.
That is not to say the markets can't fall apart here, just let price show you the way and remain nimble. If all hell breaks loose, it's a long way down and you will have plenty of entries. After all, we might not even see an ISEE close above 200 this year, so don't base your entire trading strategy on sentiment alone (or seasonality, that has been all skewed lately as the pre-election year rally started very early). Price matters and computers will trigger sell-stops or buy-stops on that and nothing else. They don't sit around and quibble over who is short or who isn't.
Some long time bears such as Bernie Schaeffer and Francois Tahan have now suddenly turned hysterically bullish and that worries me more than a few equity puts still lying around.
Futures traders keep and eye on YM 12764 support. A push below would give shorts a trade to 12736. If it holds next week, we will move up to 12831, 50% projection January and 12869 which is right at DOW 23.6% projection 2000/2002 (12824.70, set your alerts on that one).
As for a rate cut, don't put me in that camp quite yet. There is so much liquidity out there that the only concern for Bernanke right now is inflation, not a blip in the economy. And I don't see inflation ticking down. It might not be jumping up from here, but core is still on a steady rise. Why should he cut? Maybe if GDP gets a massive downward revision, but even then, he might look at it as a bottom. He is perfectly happy to let housing prices fall to where it becomes affordable for the average American.
This entry was posted
on Sunday, February 18, 2007 at 2/18/2007 11:57:00 AM.
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