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Weekend Update

We can see that the trend channel is still very much in tact. Last weeks surprise earnings report by Wells Fargo led the market to the upper extreme of the band it's been following religiously since November 08.


It's important to remind ourselves the difference between Bull and Bear market rallies. Bull market rallies are slow plodding affairs that last months. Bear Market rallies are strong, violent and relatively short. Which profile does this rally fit?

S&P Analysis
The picture is a bit mixed, but from a risk/reward perspective this marks an opportunity to take risk off the table. Trend lines and channels are not some mysterious force controlling the market. They do however show a predictable rate of economic advance or decline while the mood of the market swings from optimistic to pessimistic. Reducing long exposure to the stock market here is prudent for a number of reasons as shown by the chart.

Indicators are leaning mostly bearish but not decidedly so...yet. On the Bull side (green arrows), RSI is still rising and not yet in overbought territory. We are also 1 week into a 20/50 EMA cross. On the Bear side (red arrows) the MACD histogram is showing a slowing of momentum though. And the Stochastics have past the overbought level and deteriorating. Most importantly, we notice the upper trend, where the market currently sits, is meeting significant overhead supply. While the trend line might be pierced it is highly doubtful the market will advance cleanly through this area. More likely it will begin to break down and continue to obey the channel.



Four Bad Bears

(reproduced with permission, courtesy of dshort.com)

When comparing past Mega Bears a couple of things become clear. First these markets all obey a well defined channel. Second, if our current market were turning around it would make it the shortest of the four - highly unlikely considering the economic fundamentals going forward. So while we may indeed poke our head above our heretofore reliable channel it is highly unlikely we will sustain at this level. Balancing risks to rewards it appears we have realized 80-100% of our current move. Don't let cacophony of optimism loosen you appreciate of risks.

S&P
Implications for the S&P..... sub 700 by May-June:

No charts today, but our bounce is tiring. The market appears rready for a short term retracement. With earnings season upon us this may be an opportune time to reduce risk.