A Resolution to 'Sideways' Market Action Is Near

[Excerpted from Bill Cara's Daily Report]

CTA trader’s conference call notes:After two months of dull, listless trade and narrow price movement,a resolution to this sideways action is near. One way or another,equities are prepared to being moved by the large institutions.

What we know:

• Tuesday’s session was an outside day down (bearish implications), closing right on the neckline of a head and shoulders chart pattern.
• Volume in the S&P future was lighter than normal, but many significant declines started with subdued turnover. Volume confirmation is more important on upside breakouts.
• With everyone and their brother and sister glued to this level (S&P 880ish), be prepared for a possible whipsaw; the hard trade, the right trade, the obvious one a trap. A false or failed breakout out of a congestion area, quickly reversing back into the box, normally travels all the way back to the other side of the support or resistance. In this particular case, a failed breakdown below 880 would be expected to trade to a minimum of 925.
• If the S&P breaks below 880, closing below the level for consecutive days, measured move projections target roughly the 800-810 area. This coincides with the 50% retracement of the entire advance off the March lows, the .618 coming in around 777, very close to the 2002-2003 bear market lows.
• Since we identified June as a potential short term, countertrend turning point for US treasuries, notes and bonds have rallied smartly, up over +8% in a few short weeks. Our focus now will shift towards re-establishing bearish positions on US government debt, in line with long-term views that the United States fiscal situation is a train wreck waiting to happen.
• Oil stocks have completely broken down, but are now so oversold, traders should wait to establish new bearish bets, a reflex bounce back to higher resistance levels (prior support) would be an ideal spot to initiate positions.
• High beta NASDAQ leaders Apple (AAPL –2.32%), Amazon (AMZN –2.47%), Google (GOOG –3.17%), and Research in Motion (RIMM –3.55%) are technically vulnerable, capable of taking the market down through support.

What we don’t know:

• Will the S&P hold support? Be wary of chasing a lower opening gap Wednesday morning. Specialists love filling market sell orders well below support and then running stocks quickly back above the support, creating a short squeeze. Conversely, a feeble opening mark-up will attract selling, an easy fade for market makers.
• Will the BRIC countries band together and begin trading primarily in currencies other than the US Dollar? Probably not, but future coordinated joint statements of dissatisfaction with US fiscal policy has to put pressure on the dollar, and ultimately raise inflation higher than it would otherwise be.
• How will the market react to earnings reports? If companies beat expectations, raise guidance, but then don’t rally, watch out.
• Is a second stimulus package on the way? How would the market react to such an announcement? Our guess is bonds and the dollar would have to be sold, and gold bought aggressively as traders conclude the current group of politicians, perhaps the most incompetent group of leaders in the history of the United States, are blind to the prospects of bankrupting their country.

As trading opens Wednesday, be flexible in your thinking, avoiding the trap of directional bias. It is much easier to make the proper adjustments without preconceived notions about how the market “should” behave. If bad news is bought, then the selling is exhausted and you should ‘go with the flow, bro’.

Be careful out there.

Comments

[Mad Hedge F...:]

"Resolution" is the polite term. ) If anyone is wondering what that foul odor is, it’s the sushi that hit the fan. Even the most obstinate, nay saying perma bulls now concede the head and shoulders is in on the S&P 500. That great barometer of global risk taking, the Euro/yen cross, didn’t just break key support at ¥132.50, it completely melted down to ¥128.00. Oil traders have had an epiphany, rediscovering fundamentals like wayward sinners finding a new religion, which, by the way, are terrible. So how did crude double in the face of a collapsing economy? Was it speculators? Was it Goldman Sachs? “Green shoots” have returned to being those pesky things you get dirt under your fingernails ripping out of your back yard. If I get any more negative I am going to have to change the name of this letter to the “Assisted Suicide Daily.” So I have to finish on an up note. I’m not in the Armageddon camp, which sees us going to new lows below Satan’s 666. I think 750-800 is more realistic. But then I was always the one to take the easy money. If you get another Lehman bankruptcy type event, you could see a real crash. For the last two years, the market has had an unceasingly ability to come up with these shocks.

Jul 08 02:03 PM