Rev Shark: Mr. Market Could Get Testy Today
09/14/2010 8:15 AM
"Rules are mostly made to be broken and are too often for the lazy to hide behind."
-- General Douglas MacArthur
During the rally from March 2009 through April 2010, one of the most challenging aspects of the market was that when it became extended, it tended to continue and become even more extended. To make it even more challenging, the rallies often had diminishing volume as we went higher.
I wrote quite often about how this just wasn't what you'd normally expect to see. The basic rule of technical analysis is that markets don't go straight up and the move is even less trustworthy if it is on decreasing volume.
If you followed that fundamental rule of technical analysis in 2009 and early 2010 you missed out on much of the market upside. Our low-volume V-ish rallies persisted and repeated themselves numerous times.
There were a number of reasons why this occurred, but the foremost was that the bailouts and stimulus plans had created a huge supply of cheap money that didn't have any place to go. The yield on fixed income was nil, and the real estate market still had shown few signs of bottoming. Hence much of the money was parked in equities.
Since the top at the end of April, the market has been acting much more like technicians would expect. We have been turned back at key resistance levels four or five times and have found support around levels you would expect.
When the market is up seven of the last eight days, however, like the Nasdaq has been, you have to start wondering whether we are going to start seeing a repeat of all those V-ish moves similar to we saw prior to April 2010. There hasn't been any big increase in stimulus and bailouts in the last few months, but there is still plenty of cheap money out there that is looking to find a return.
Today is going to be a particularly good test of whether we have a propensity for another V-shaped move. We have gone from oversold to overbought very quickly and have cut through two significant overhead resistance levels on just average volume. We now face the next big technical hurdle, which is the highs we hit back in August. If we cut through those without some sort of consolidation first, then the V will definitely be back in play.
It is always difficult to gauge the strength of momentum against overbought technical conditions. If market players are underinvested and anxious about being left behind, it can easily result in an extended market becoming more extended.
Based on the charts, the prudent move here is to start looking for some sort of pullback or consolidation, but many stocks are acting very strong and there isn't any compelling reason to sell other than to lock in some gains.
My style is to always take some partial profits into strength and to try to ride the momentum as long as possible, but as we become more extended, I want to tighten up stops and be less trusting of further upside. That often proved costly prior to May 2010, when we had huge runs of successive positive days.
The bulls have the momentum and they are working on a V-ish move, but technically, it is time to look for some sort of consolidation. I'm going to stay focused on individual stocks and make sure I protect my gains, but I'm not going to be outright bearish until I see that a V-ish move is off the table.
We have some very minor weakness in the early going. Overseas markets were mixed, but retail data are coming in better than expected.
Buckle up. It is likely to be a bumpy ride today.
