MAILBAG QUESTION:

"where do you think the market is headed? I'm thinking down because stocks are up a fair amount from lows and the market cant get above prior highs. Your thought on this?

MY RESPONSE:

What I know for sure is ... well, two things. I liked buying index calls when the market was oversold such as seen with my first chart (of SPX) but won't typically stay in when the Market has had a decent move already and then starts going sideways. Moreover, if in long calls, premiums also stop expanding and start shrinking with the dampened volatility.

A colleague of mine used to call lateral/sideways moves (especially AFTER a good-sized advance) 'indecision patterns'. As in there's not enough fresh bullish news to pull prices still higher but not enough bearish influences to pull em down either. Indecision makes me want to DECIDE myself to do something else until the market chooses where it wants to go next.

Two more things: sometimes a sideways trend after a substantial prior run up is tracing out what technical types call a rectangle top. Sometimes a sideways trend after a prior advance is simply a consolidation pattern; as in a stock or a major index is 'consolidating' its prior advance, meaning a pause while market forces digest the previous move so to speak.

A THIRD thing here: since many of us trader types have a number if not plenty of opportunities to get in early in a trend in a given year, it's sure a lot 'easier' to wait for more 'obvious' reversal-type patterns; e.g. tops or bottoms (especially bottoms) that are V-type reversals. My hourly S&P 500 (SPX) chart seen below that has several examples in recent weeks of 'V-tops' and 'V-bottoms'. Patterns ALSO accompanied by overbought (V-tops) or oversold (V-bottoms) extremes. And, when apparent tops or bottoms ALSO occur at the top of bottom of a well-defined price channel it's a triple whammy convergence of reversal type 'signals'.

TOPS are also simply harder to predict and making a decision to play the short side tougher to 'time'. I like to think of how the market hangs on the upside for a time as akin to a ball thrown up high into the air and where the forces of upward momentum reach a seeming momentary pause, before the downward pull of gravity takes over. Of course with the market, such 'hang time' can go on for hours, days or weeks. Not so with bottoms. Traders and investors that are going to sell tend to dump most of what they want to close to all at once and selling dries up or can, pretty quickly.

Aside from short-term computer programs, buying stocks by funds and individuals is often to buy a little, wait, buy some more as the rally continues, wait, buy some more, etc. Selling doesn't get big until there's a SHARP downside reversal or very bearish news. Panics lead to big selling climaxes.

Going back to the idea of the market hitting a top here as I've been asked about, I've had a longer-term bullish bias for some time and even have sketched out a bullish 'wave' pattern on the finest of cocktail napkins that looks like the longer-term (weekly) SPX chart below which I throw in at no extra charge.

SPX could be headed to the 1550 area again and retest the massive double top of 2000 and 2007. Since 'triple tops' are not all that common, a further advance could be substantially above this area (e.g., to 1800) or substantially below, such as to around 1450. Hey, I like to speculate on when it might be best to sell some investment stocks from time to time! But, back to trading considerations.

Here comes another thing on when the major stock indexes go sideways after a substantial (e.g., 8-10%) prior advance, we need to look at the bigger trend picture than seen in my first chart above, that of the hourly SPX chart. And, we should look at any major index that is ADVANCING (even if modestly), rather than trending sideways, to get a more complete picture of what's going on.

The strongest current sector or index is tech (what else!) as seen with the tech-heavy Nasdaq, especially with the big cap Nasdaq 100 (NDX). NDX is managing to eke out further recent gains, after a substantial early-week advance last week and after NDX traced out a bull flag as I noted in my weekend Index Wrap commentary. I suggested then that if this (bull) 'flag' pattern was true, prices would continue higher EARLY in this week as is characteristic of flag patterns; i.e., a spurt higher (with bull type flags), a sideways consolidation of only a few days, followed by a move above the prior sideways price range. This pattern has been true to date in NDX.

Yet another thing: if looking for a further substantial run up or a further up leg, I wouldn't bet too much on it. Besides being near an overbought extreme on a two/two+ week basis judging by the 13-day RSI (measuring 13 trading days) which tends to slow down further advances (not arrest them necessarily), NDX is still hitting resistance implied by its late-March/early-April Closing and intraday highs ranging from 2741 to 2756 respectively. Moreover, the Index is at the high/resistance end of its broad uptrend price channel.

Regarding playing the short-side of this market and certainly relating to NDX, its chart is bullish and the trend is clearly UP. I don't short a bullish stock or index chart.

However, resistances implied by prior highs, trend channel boundaries and the like as well as the risk of a shake out implied by an intermediate overbought condition, doesn't suggest good risk-to-reward in either going into NEW bullish plays or overstaying in existing bullish strategies.


GOOD TRADING SUCCESS!