Trading Plan for January 23, 2012

Economic Reports Due out (Times are EST): None

Premarket Update (Updated 9am eastern):

• U.S. Futures are mixed/flat.
  
• Asian markets in a mixed fashion as well. 
  
• Europe is trading about 0.5% higher on the day. 
  

Technical Outlook (S&P):

• For the second straight session, we have closed above the downward trend that started last year off of the 5/2/11 highs.
• Volume picked up noticeably, due mainly to Friday being Options Expiration. 
• We’re at overbought levels, that practically always leads to a pullback of some kind in the short-term.
• Any sell-off we get of significance at this juncture, would likely push us back below the descending trend-line from the 5/2/11 highs. 
• We’ve traded above the 10-day moving average for 21 straight days, and have finished in the green 17 times during that span (+80% of the time).
• 30-min chart shows another nice bull-flag pattern. In recent past, these have been precursors to new leg-ups in the market. 
  
• 5-min chart shows a similar bull flag trying to break above 1315.
• Last January we marched higher in all the indices in similar fashion in similar fashion to what we are seeing now, 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.
  
• Short term support for the S&P lies at 1278, 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:

• With the overbought nature aforementioned, FOMC Statement that is released on Wednesday, could be the catalyst that leads to selling pressure in the market. 
• BUT… the thing to remember at this point in time until proved differently – is that there is a constant bid underneath the market. Sell-offs and when they come (though we know they will) is pure speculation as to exactly when. 
• This is a hard place to be at in the market. Because initiating new long positions is dangerous, because we know 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 it 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 the RSI, for example, is not making a moves higher with the price action that we saw, showing the potential for a false breakout. 

My Portfolio:

• 15% Long
  
• Initiated a long position in Valero (VLO) on Friday at $23.18.
• I’ll look to day-trade this market today, and add some swing-trades to the portfolio as well, should the conditions permit, with little desire to hold through Wednesday’s FOMC Announcement.
  

Chart: