Trading Plan for January 20, 2012

Economic Reports Due out (Times are EST): Existing Home Sales (10am)

Premarket Update (Updated 9am eastern):

• U.S. Futures are mixed (with Nasdaq showing some strength) but overall, they are down slightly.
  
• Asian markets trading much higher between +0.8% up to 2.0%
  
• Europe is trading in a mixed/flat fashion.
  

Technical Outlook (S&P):

• The S&P challenged the 1313 price level of the descending trend-line off of the 5/2/11 highs, and broke through it, albeit barely.
• Ideally, for bulls, they need to create separation between the descending price level and current price action, which would require additional follow-through yet again today.
• A sell-off here, would disqualify the break of the descending trend-line that we saw yesterday.
• Volume continues to be on par with recent weeks.
• We’ve traded above the 10-day moving average for 20 straight days, and have finished in the green 16 times during that span (80% of the time).
• Very solid uptrend in place on the 30-minute chart.
  
• 5-min chart shows a bull flag – break above 1315, and we could see another leg higher, intraday.
  
• Market is absolutely due for a pullback – “when” is the big question. Last January we marched up nicely in similar fashion, then on the 28th of the month, there was a major sell-off out of nowhere. I would not be surprised to see a similar scenario between now and the end of the month as well.
• Over the past 3 months we have rarely had a trending down-day, meaning the market continues to put in lower-lows and lower-highs. Instead, we get a strong push in the morning, followed by a brief basing pattern, and finally a rally in the afternoon that wipes away much of the day’s losses. Remember this going forward and in particular with today’s slight weakness.
  
• Short term support for the S&P lies at 1261, and long-term support off of the October lows lies at around 1242. The market isn’t anywhere close to threatening these levels.
• There still remains unfilled gaps from 11/28, 1/3, 1/10 and 1/17. Highly, highly unlikely all four of these gaps go unfilled for very long.
  

My Opinions:

• This is a hard place to be at in the market. Because initiating new long positions is dangerous, because we are absolutely primed for a pullback of some kind, and to short the market has its own set of problems as well, considering how resilient this market is right now.
• We are definitely seeing the January effect in full swing and the big question is, does fizzle out like we saw last year, or do we continue to trend higher through 2012.
• Bearish sentiment is at a 6 year low, which is a prime opportunity for the bulls to have the carpet pulled out from underneath them.
• I wouldn’t recommend shorting this market, as it is in all-out attack mode, and could continue trending higher longer than we think is possible. Much of this rally, has more to do with the bears being squeezed, than it does with the bulls being inspired as evidenced by the low volume levels.
  
• Some divergences occurring with indicators and price, where stochastics and RSI, for example, are not make a moves higher with the price action that we saw, showing the potential for a false breakout. 

My Portfolio:

• 100% cash
  
• I’ll look to day-trade this market today, and add some swing-trades to the portfolio as well, should the conditions permit.
  

Chart: