Perfect Storm for This Week: Low Volume, Egypt Chaos and Ben Bernanke

by: Jason Cimpl

The market blasted higher yesterday as the indices fed off the falling dollar. Volume was low, but the buying was broad based which gave that rally credibility.

With 95% certainty, I thought we would close positive yesterday. But not even I thought the indices would jack-up to fresh highs.

The bulls are simply amazing and the bears - worthless.

The market received great employment data this morning, monthly jobs posted a 187,000 jump. Government statistics will be out this Friday and analysts expect the unemployment rate to increase to 9.5%. It will be intriguing to see how Ben Bernanke will respond to negative job growth using government data and positive employment growth using private.

Heading into this week, I was bearish, but like any (good) trader I am willing to adjust the strategy. My rational for a negative week are as follows.

The indices were up against, or very close to, long term resistance areas. Additionally, the Nasdaq and the Russell printed reversal patterns near these zones in late January. While the other indices had not made reversal patterns, the bullish momentum was dwindling.

In addition to the selling pressure, we also observed inverse correlations between stocks, dollar and yields return. With the stock market at resistance and treasuries/dollar at long term support, it was more likely that stocks pull back and the treasuries/dollar advance - at least in the near term. Fortunately, the correlations remain present, but the trade is moving against us. The dollar looks poised to break through support, which will push the market to new rally highs. Meanwhile yields continue to rise as investors empty out of bonds and float into riskier assets.

As quickly as the selling pressure came last week, it is gone this week. The bears failed to take the indices lower. And more importantly, sellers could not bring the U.S. indices through any support zones. We cannot have a bearish trend if the sellers can't bust through support.

Despite my lack of confidence in the bears, I believe even the bulls are getting tired. The rally this week was perpetuated by a fall in the dollar as well as a rise in oil due to tension in Egypt. While the aforementioned event provided buoyancy to the U.S. indices it by no means laid ground work for another leg higher.

Our portfolio positions are dropping like flies. The portfolio lost Rudolph Technologies (NASDAQ:RTEC) to stop losses for a 4.6% gain and Dot Hill Systems (NASDAQ:HILL) was also lost to stops for a 55% gain. This leaves the TradeMaster portfolio with three bullish positions (China New Borum (NYSE:BORN), EnerNOC (NASDAQ:ENOC), Alon USA Energy (NYSE:ALJ)) and hedged by TYP and DXD. Inverse ETFs like TYP are my preferred method for hedging. Not only are the inverse ETFs easy to trade, they also have levered versions which are similar to options.

While I prefer to take long positions in stocks for a bullish trend, the inverse ETFs do not require margin to purchase, which makes them great for bearish phases. Here is a list of these ETFs, if you are unfamiliar with the class.