There is a wide range of opinions out there right now concerning the direction of this market. Just from those who comment on this blog and follow my twitter feed, I’ve seen a lot of diverging opinions. For one, there has been some bearish divergences popping up on market indicators, particularly the McClellan Oscillator, which failed to make a new high when the market did on Friday – and we’re not talking a little bit either – it could be seen from outer-space practically. However, you have this 1130 price break that, in my opinion, trumps the those bearish divergences that we are seeing. Think about it….we’ve been in consolidation for the better part of five months (since the April highs) between 1130 and 1040. Last Monday, we broke out above 1130, and followed through on that breakout last Friday. Typically, once price breaks out of consolidation, in either direction, there is usually a major price move, which is what I believe we are in the midst of.
But I was honestly thinking that today might turn into a blood-bath for the bulls considering how horrid the Consumer Confidence report was (48 actual versus 52 expected), and after the huge sell-off early on, we actually rallied back and finished in the green for the day. That is a good sign that the bulls are still putting capital to work and buying the dips. Though I hate seeing, for the third straight day, price fail to break through the 1150 level. Furthermore, it shows that the market expects or has priced in some pretty bad numbers and with GDP and Jobs coming out Thursday, you have another potential catalyst for the market to rally higher.
I do though, hate going long in this particular market though. Everything about the economy and the reports we are seeing shows that there is nothing to really be desired. However, price action trumps my personal beliefs and I’m not going to be stubborn to the extent that because I think the market should go down, when it clearly is not, that I should just continue going “guns-a-blazing” (Yosemite Sam syle) to the short side. I drew the line at 1130 and since then I have looked for every opportunity to now go long. The other argument that I am hearing is that we are in the midst of a headfake that will try to suck in as many traders to the long-side and then in one fell-swoosh, pull the carpet out from underneath the bulls and head lower, creating a double-dip scenario. Ultimately, that may happen, but head-fakes can be very difficult to predict and time. The fake could be after the S&P runs up another 100 points with all sorts of bearish divergences along the way, at which point, you would take a killing trying prove your thesis out.
Some other factors is based on seasonality concerns. We are on the brink of a pretty historic mid-term, that at the very least will create a gridlocked federal government with the Republicans taking at least the House, and a remote chance at the Senate. Such an outcome would be good for the market, as it would prevent anymore anti-Wall Street legislation from being passed, and huge systematic shocks to the economy as a result. Remember as well, that we are coming up on third year of Obama’s term
(hopefully his last one too) which has historically been the best year of the four, averaging over 14%.
So there is a lot of evidence suggesting that we could see further upside to this market, and I believe that we could see this market act very similar to the inverse head and shoulders breakout from January and February, that ultimately peaked in late April. But with that said, I know that I can always be (and quite often) proven wrong.