Trading Plan for January 26, 2012

Economic Reports Due out (Times are EST): Durable Goods Orders (8:30am), Jobless Claims (8:30am), Bloomberg Consumer Comfort Index (9:45am), New Home Sales (10am), Leading Indicators (10am), EIA Natural Gas Report (10:30am)

Premarket Update (Updated 9am eastern):

• U.S. Futures are moderately higher. 
  
• Asian markets were mixed ranging from -0.4% up to +1.6%
  
• Europe is very strong, averaging 1.6% in gains. 
  

Technical Outlook (S&P):

• The bulls managed yesterday to rally off of the day’s morning lows, and put together an impressive rally following the FOMC Statement. 
• For the first time since 1/19, we are seeing a gap higher going into the opening bell. 
• Yesterday saw the S&P break out of the previous 4 days of consolidation, in a very decisive manner. 
• Volume was notably strong, due mainly to the FOMC statement that was delivered. 
• Whether this market can sustain itself to the upside is anyone’s guess long-term. But Short-term, there needs to be a pullback to 1249-1270. 
• Since the 19th of December, the S&P has not put in a single “lower-low” even on the 30-min chart. This needs to happen before the bears can do anything worth mentioning. 
• We’ve traded above the 10-day moving average for 24 straight days, and have finished in the green 19 times during that span (80% of the time).
• 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. 

My Opinions:

• 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.
• 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 move higher with the price action that we saw, showing the potential for a false breakout. 

My Portfolio:

• 15% Net Short
  
• Initiated a long position in (TZA) Monday evening at $22.27
• 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: