A Look Ahead 3.28.11

Ok – let’s keep this as simple as possible.

The market is never 100% predictable. Anyone who thinks they know where the market is going is either superhuman, or delusional. Remember, we’re not in the cockpit of this airplane, we’re passengers. And as a passenger, we can choose to fight the pilot, hang our heads out the window, heckle the other passengers, OR ride quietly and enjoy the ride. We can’t see what’s in front of us – we’re just looking out those tiny windows running along the side of the fuselage. But, we have a general idea. We can see clouds, the sun over the horizon, etc.. but, we can never see directly in front of the plane.

The charts tell us the story we can see out these windows. Our job, as retail traders, is to asses the risk in the market (the pilot’s risk in guiding the plane towards our destination) going forward and trade accordingly. Do we see storm clouds, maybe we’re feeling some turbulence. Whatever the case may be, the risk we’re willing to put in the market depends on this limited view of an unpredictable future.

Last week, we saw a ‘V’ shaped reversal off Fib retracement and sma100 on the SPY. That was the technically favorable rebound and luckily, we went back up instead of giving bears significant control. However, looking out the window, we still see a lot of clouds and the turbulance hasn’t cleared up. Why?

• Inflation (food and energy)
• Unrest in Libya and many areas of the Middle East and North Africa
• Oil pricing holding strong above $100
• Japanese Nuclear fallout
• QE2 artificial market propup – fear of what’s next
• Debt
• Consumer sentiment

From a technical standpoint, the charts are not sunny, either.  Let’s keep it simple – the “V” shaped market reversal has been, and continues to be, on weak volume. The increase in price with a decrease in volume is a bearish divergence.  Dispite the annemic volume, it was a hell of a week for day traders as the beaten down market was traded on increased ‘risk trade’ activity.  However, volume is largely on the sidelines because the swingers see storm clouds and the plane is still shaking.  This is one of the rare times that a market can move up without volume – it’s called QE2.

QE2 is creating a lot a cloudiness on the charts. We’ve already seen that this market can move up for months on weak volume.  So, it’s the wild card.  We can’t just avoid a bull market if it’s not supported by volume.

My theory is that a the volume is on the sidelines because we’re entering earnings season on the shoulders of higher input costs for companies.  Add that to a lot of global uncertainty and it feels like traders are resting here.

So, what do swingers do?

A few thoughts:

• Limit the number of take home trades (swings)
• Avoid holding stocks overnight into earnings and holding stocks who’s stronger peers are reporting
• Watch market volume. We need more of it.
• Watch SPY/IWM, etc.
• Pay attention to the news ‘tone’ – you don’t have to know everything going on in the world – but, it’s easy to see if the news channels are spreading fear or optimism.  Hard to trade long on fear in the are.
• Find the strong sectors.  More turmoil in the world – look for fear trades – energy, gold.
• Pay attention to earnings.  Are there sectors showing impressive reports?  Look for the laggards in their sector for a possible day or two swing
• Shorten the time-frame and tighten your stops
• Watch to see if the media convinces the market that Japan is a recovery trade and the best thing that could happen to global growth  despite the devastating human toll.
• Watch the McClellan Oscillator. If you really want to find the bottoms in the market, consider watching McClellan (T2106 in freestockcharts.com).  Check out the chart below.  The green shaded area implies the market is over sold… red, over bought.  Right now we’re in a chop chop zone in the middle – no obvious bias

Economic Data this Week: Bloomberg

Big week in numbers coming out.  Most of it is later in the week, but Tuesday’s consumer confidence will be interesting.

Earnings Reports: Briefing

Earnings will start beefing up as the week goes along. I have an eye on most, but focus on  MOS and CONN.

Summary:

I’m still market neutral and staying very selective.  I would like to see the SPX show strength above sma50 instead of printing a doji with weak volume.  I’m concerned that the sectors that moved well last week are now technically oversold, to slightly oversold on no volume.  If we see a drop in SPX or SPY below sma50, I expect a significant drop to SMA100 range on SPY.  Even if the drop back isn’t that strong, I will likley stay out of longs if SPY falls back under sma50 – implies under 130 (psychological pivot).