Rev Shark: Good Technical Setups Are Scarce
11/19/2010 9:07 AM
All you need in this life is ignorance and confidence; then success is sure.
-- Mark Twain
After an anemic oversold bounce attempt on Wednesday, the bulls regrouped and put together a classic bounce on Thursday. The General Motors (GM - commentary - Trade Now) IPO received much of the credit for the strength but it actually traded quite poorly in view of the endless hype in the media. The stock opened well and almost managed to nudge $36 in early trading, but then it sold off the rest of the day and closed near its lows, ending with a gain of about $1.
The fact that the market was able to digest such a huge IPO is a positive but let's not forget that a ton of liquidity was sopped up to support this behemoth and that is a negative for other stocks. GM is acting poorly in premarket trading and that is going to be a negative if it doesn't find some support before it hits the $33 offering level.
The real driving force behind the strength yesterday was hope that Ireland was close to some sort of bailout from European Union and optimism that the attempts in China to cool off their hot economy would not be as onerous as many anticipate. In fact, China raised its reserve requirements again last night and stocks rebounded after a brief stumble as the news hit.
Federal Reserve Chairman Ben Bernanke is overseas today, arguing that the weakness in the dollar caused by QE 2 really isn't such a bad thing and that emerging economies need to let their currencies rise against the dollar. The market isn't particularly thrilled about the worldwide unhappiness with QE 2 and that is causing some pressure in the early going.
Yesterday, I was pondering whether this market had the capacity to pull off another V-shaped bounce and fight back to recent highs. Being confident and ignoring the basic rule that V-ish bounces shouldn't be trusted very much has been the way to make money in this market. Technically, V-shaped bounces are always suspect but that rule has been a loser for the last 18 months.
Normally after a sharp pullback, trapped bulls look to escape and aggressive shorts look to reload into strength. That has not been the norm in this market for some reason; I tend to attribute it to the flood of liquidity caused by the Fed. That cash needs to go somewhere and anytime the market is off its highs, it tends to flow there. Market players are constantly worried that they will be left out as the market bounces back after a pullback.
This tendency toward V-ish bounces creates a dilemma for disciplined traders. On one hand, we don't want to chase bad entries, but on the other hand, this market has consistently rewarded exactly that behavior. From my standpoint, it still isn't worth the risk but I've learned to respect this resiliency and am not going to fight it.
What makes things particularly interesting at this juncture is that we are heading into some of the most positive seasonality of the year. Trading around Thanksgiving and into the end of the year is usually quite upbeat so we'll have to watch how sentiment develops.
Yesterday's bounce is under attack this morning. We'll have see if the bulls are going to make a stand and actually allow the market to roll over which has been the more typical technical action after a dip such as the one the market suffered recently.
I plan to keep looking for good technical setups to buy, but I don't expect to find much. In fact, I hope I don't find much because a day or two of rest now would be a good setup for some good Thanksgiving trading. If we stay flexible and keep to a short-term strategy, we should be in good shape.
Long GM
