Tricky Times
By Rev Shark
RealMoney.com Contributor
07/23/2010 7:50 AM
Thus, flexibility, as displayed by water, is a sign of life. Rigidity, its opposite, is an indicator of death.
-- Anthony Lawler
For the second day in a row, good economic data have the market percolating higher in the early going. This time, it was the business climate index in Germany and gross domestic product data in the U.K. that came in above expectations. That is helping to offset the weakness we had last night on earnings reports, but keep in mind that we are awaiting the release of the European bank stress tests later today.
There has been a high level of optimism about the stress tests, and we have probably been pricing that in. So, we'll have to be watching for a sell-the-news reaction when the bank news hits around noon EDT today.
Earnings reports last night were quite mixed, with disappointments from the likes of Amazon (AMZN - commentary - Trade Now), SanDisk (SNDK - commentary - Trade Now), Capital One (COF - commentary - Trade Now) and QLogic (QLGC - commentary - Trade Now). However, Ford (F - commentary - Trade Now) came in solidly this morning, and Microsoft (MSFT - commentary - Trade Now) is up a little after an upgrade. The indices were quite weak last night as reports came in, but we are looking better this morning after the upbeat action overseas.
The action yesterday caught many market players by surprise, which gave the move some heft, as many underinvested bulls scrambled to add positions. Many were ill-prepared for the sudden spike up, especially after Fed Chairman Ben Bernanke had put the freeze on the action during his Congressional appearance on Wednesday. It was a typical bear-market spike, which has added zest, because folks just aren't ready for it.
The big question now is whether we can build further on that spike and maybe even end this downtrend that has been in place since April. The first big obstacle for the bulls is the 1100 level on the S&P500. That is where we failed last week, and it's where we stopped yesterday.
I'm looking for 1100 to be pierced, which will trigger buy stops and bring in bulls worried that they are going to miss a change in trend. Once that happens, I'm looking for further upside to become much tougher.
The really big technical obstacles are the 200-day simple moving average of the S&P500, which is at 1113, and the June high, which is at 1131. Those are the levels that need to be broken to really prompt a change in market character. We are at an important juncture as we move through 1100, and if the bulls really have the juice they exhibited yesterday, these resistance levels will fall fairly fast. I'm not convinced yet that a change in character is imminent, but I'm keeping an open mind and am not looking to mount shorts unless we see some persistent weakness once again.
This has been a tricky market, as we have had alternating days of very good and very bad action. One day, it looks like we are about to fall apart, and the next, it is like we don't have a worry in the world. It makes it tough to build. Hold on to sizable positions and you'll be whipsawed if you set stops too tight.
I'm continuing to give the bulls some room to prove themselves, and I'm taking some short-term long-side trades, but I'm doing very little as far as building longer-term positions. I'm concerned that as earnings season winds down, we are going to lose them as a positive catalysts and that we'll roll over again. However, there are still hundreds of reports to come over the next two weeks, and that can add a lot of uncertainty, especially as we deal with significant technical overhead.
In summary, I'm leaning bullish, but staying very flexible. I'm not overly optimistic that we'll have enough buying power to shift the intermediate market trend to positive. I'll try to knock out some trades while I can, but I'll be fast to hit the eject button if we begin to falter.
At the time of publication, Rev Shark held no positions in the stocks mentioned.
