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Trading the Market 6-1-2009

admin on 06 1, 2009

“The markets are enjoying a huge rally this morning….”

That’s how last week’s Week Ahead began.  We really don’t have to change a thing to make it fitting for this week.  May closed out in a very curious way last Friday.  Nearly 100 DOW points were tacked on in the closing minutes of that session.  “End of the Month Markup Madness”???  Use the headlines to entice the reluctant in JUST IN TIME for the terminal wave?  Possibly, but it is also possible that our friends wanted to get a running start on the “buy on news” GM bankruptcy short squeeze that seems to be launching the “Blowoff” phase that we were looking for about a month ago.  When we didn’t see that phase unfold immediately, we began to focus on what we thought would be volatile manipulation in both directions driven primarily by the risk entailed in the inverted head & shoulders pattern that we’ve had our eyes on.  Fortunately that’s how things have played out but now that the DOW has blasted through 8600 we’re guessing that the boys try to push it to the 9050 – 9100 level.  The 8600 resistance has served us well but Goldman Sachs needs a new pair of shoes and thus with their business model severely damaged the proceeds need to come from trading.  Thus, another banner quarter for what the Fast Money boys would call the best and brightest.  It’s gotta be tough to beat the markets when you not only know the news in advance but help to write it!

So the rally that’s defied most market watching cynics continues.  Fortunately our Technical Analysis has kept us from getting bearish on the market action even as we remain highly skeptical of the long term viability of China-enabled lighter fluid effect to keep things as toasty as the current crop of crowing perma-bulls would have us believe.  Commerce nearly halted in what was once the good ole USA in the fourth quarter of 2008 and first quarter of this “transformational” new year.  That’s going to make it fairly easy for even a modest improvement to register in comparatively positive way in the economic statistics.  Plenty of pitfalls remain, in fact, there are far, far too many of them to delve into here in this Week Ahead.  BUT, if we’re trading that’s different time-horizon wise from investing generally and although we keep the macro problems in the back of our minds at all times, we still must not allow our long term concerns to prevent us from participating in rallies such as the one that we continue to witness.

If statistics begin to matter again with respect to the downside, the most likely ones would be related to employment/unemployment and they will be published at the tail end of this week.  If they’re extra-fudged that could be the final phase of the blowoff phase but we don’t want to get too far ahead of ourselves.  We state that though because those numbers are the best hope for bears.  They will likely latch onto those numbers as their capitulation buffer.  That is, if the blowoff unfolds this week and bears still haven’t covered to that point, they’ll be looking to those numbers as the catalyst to end the rally, which they could if ugly.  BUT, if those numbers are really well-done, that could break the remaining bears and bring frustrated from being too patient bulls of the sidelines.

With all undue respect to the “we’re returning to business as usual” perma-bull camp, there are obvious things that are starting to threaten the nascent recovery.  $70 oil , higher mortgage rates, a still worsening employment situation are a few that leap to mind.  But as far as inflation being dead, we’d have to point to inflation in stock prices because they’re perceived as the only game in town.  With respects to Ron Paul, Daniel Hannan, et al.,  and those that have made similar comments in the past, it does yet appear that many still believe to the contrary of: You cannot spend your way out of recession or borrow your way out of debt.

To which we’d add that much higher taxes, enormous debt, crushing future obligations and a world less interested in investing here than in their homelands await us.  Not to mention an unhealthy and enormous dose of socialism and entitlement explosions.

If it were this easy than why aren’t we doing it up even bigger than we are scheduled to?

Keep this type of skepticism in your “back pocket” for later but for now let’s trade the market we see.  Until we see the technicals that have served us well thus far begin to flash warning signs we have to keep the blinders on and go with the flow.

The Technical Picture:

“Just above is this week’s updated chart.  Its color coded so it should be easy to follow.  Since this inflection point is what it is, the crew should be able to get a lot of mileage out of the market right now.  They feigned a break of sloped support last week but left 2 indecisive candles.  And they’ve jam-jobbed things very strongly this morning giving new and patient shorts the treatment.  News permitting we think that the crew tries to head towards the other side of the neckline for even more fun with existing shorts and to add to the merriment by enticing fresh longs of course.  Volatility is profitable for trading, especially when you know the political outcomes and plans and in fact future statistics like the big players on the Street always do.”

Those are some of last week’s comments technically speaking.  Our chart is color coded again and we’ve left a little intact but our comments would be the same in many ways.  The double bottom is working it’ magic and our oscillators in conjunction with the market action are not yet screaming “SELL”.  If this is indeed the blowoff phase that we’ve kept an eye out for then we’d expect to see about 5 to 6% tacked onto last week’s index closing levels before the last buyer has bought.