R2K Non-Confirmation

Yesterday, I posted a chart of the SPX breaking out of its rectangular trading range. However, the small caps have not confirmed the breakout yet (click chart to enlarge):

The May 20th down-gap serves as the upper resistance (red arrow and red box). Today, the IWM was able to fill the lower half of the gap (blue arrow) and exceed the peak from May 28th (purple arrow), but was unable to close the deal.

This is a key test to watch because the rest of the market cannot rally further without the participation of the small caps.

Wednesday’s Trading – 6/16/2010

Grasso Gets Squeezed
On CNBC Monday and Tuesday, floor trader Steve Grasso said that the market is rallying due to quarter-end markup. Since when, may I ask, does the markup begin three weeks before the end of the quarter? And with the money gushing out of mutual funds, where exactly are they getting this alleged cash to take the market up? Answer: it’s all BS; there is no markup going on. The buying is all being done by shorts covering-up, and Grasso sounds like a trapped short.

Note to Grasso: it could be worse. You could be a pelican trying to dive for fish in the Gulf of “Peak” Oil.

Another note to Grasso: one thing you can be certain about in the market is that there is always a retracement.

Super Semis
The economic “canary in the coal mine” semiconductors are chirping a bullish song. The SMH is now above all of its major moving averages on the daily chart: the 20, 50, 100, and 200. It’s next challenge is the 61.8% retracement of the sell-off just above at 28.67.

Nosebleed Breadth
The McClellan Oscillator is now way up in the clouds at +249.74. This is the level where bear-market rallies go to die. But are we in a bear market? Time will tell. If we are still in bull mode, the market will give back a little ground over the next few days, and then blast higher. If you are short, you want to see your positions begin to produce very soon. My TICK indicators are also bleeding from the nose, so I would expect flat-to-down this morning – at least until the TICKs unwind a bit.

How’s that for Accuracy?
Here’s me at 12:57pm on Tuesday:

If the SPX takes out 1105, the next target up on my list is 1115.05.

And where did the SPX close? At 1115.23, only 0.18 points above my target. That that Nostradamus!

SPX Rectangle Pattern

The SPX broke out of a rectangle pattern today. A 100% completion of the pattern would target the May 13th peak at 1173.56 (click chart to enlarge):

The red box is the rectangle, the blue line is the pattern projection, and the blue X shows the target level.

SPY’s volume increased today, but not enough to rule out a false breakout in my opinion.

Tuesday’s Trading – 6/15/2010

Bearish Factors:
1) The market is at an overbought breadth extreme.
2) The IYT printed a gravestone doji candlestick on its daily chart.

Bullish factors:
1) Moody’s downgrade of Greek debt only resulted in the loss of 2 SPX points on the day. That’s a bullish response to bad news for the second day in a row.
2) The IWM refused to fill its morning gap, and refused to make a 9/36/15 cross-down.

If we are still in bear mode, the breadth extreme should produce a wave down soon. If we are in bull mode, the market would tread water while the extreme mean-reverts. The IWM might give us the best clue today. Filling its Monday-morning gap, and making the 9/36ma cross-down on the 15-minute chart would likely be a bad omen for the day. A flat day would be a win for the bulls.

The Market’s Reaction To News…

…is more important than the news itself. Right?

I was very surprised to see the market rally after the pre-market plunge caused by the weak retail-sales report Friday morning. It reminds me of how the market rallied in 2009 every time a terrible Non-Farm Payrolls report was released. Shrugging off bad news is a hallmark of bull markets. And so is recovering from a morning down-gap.

I imagine that if the shorts are taking profits, the market could continue rallying for quite a while. If everybody is short, and everybody starts to take profits, then everybody is buying, right?

The question though is, will the short-covering continue, and if so, how high will the retracement be? Will the bears want to ring the register before earnings season begins?