Yesterday’s snap-back rally probably has many bulls feeling pretty good about being long, but I’m definitely not in that camp. The volume was considerably lower and almost every chart I look at is wrecked from a technical point of view. Ultimately I don’t know if we bounce here or head lower, but I am seeing many signs of weakness that weren’t there during previous corrections and this leads me to believe that this time could be different.

Even though I’m quite bearish now, I don’t think it’s wise to load the boat on bearish positions just yet. There is still a good chance we drift higher for a day or two before rolling over. As I stated before, the markets were quite oversold. One strategy would be to buy partial short positions late in the day tomorrow, or Monday, and complete your position when/if the markets do start selling off. That way if the markets do rebound and go onto new highs you’re somewhat protected from leveraging yourself too heavily on the short side.

4 negative aspects about the chart above (click to enlarge):

1. Nearing the top of the current uptrend.
2. Volume fell on Thursday when the Dow made a new yearly high, and then we had a distribution day on Friday.
3. Dow 10k acted as a magnet and now that we overcame that psychological number, we could “sell the news”.
4. This is probably the most significant as the McClellan Oscillator is now negative, and could make a new lower low. The fact that the market is near it’s highs and this is not confirming is a troubling sign. While it’s not reason enough to aggressively short the market, it clearly is a sign to lighten up on one’s exposure to the long side.

Tupperware (TUP) has been on a tear since the market lows rising nearly 4-fold, with no end in sight. Looking at the weekly chart (click to enlarge) you’ll find a chart hitting new 2 year highs with RSI confirming. The daily chart below (click to enlarge) is just as good with higher highs and higher lows, with yesterday being an exceptionally large volume day.

Other stocks that popped up on my scans today are Checkpoint (CHKP), Microvision (MVIS), Tractor Supply Co. (TSCO), Valeant Pharmaceuticals (VRX), and F5 Networks (FFIV). All are market leaders with strong weekly and daily charts.

Judging by the after hours reaction to Intel (INTC), it’s looking like we’re going to gap to new 2009 highs on the Nasdaq tomorrow. It will be critical for the market to continue higher for it to hold the highs, consolidate, and then push to new highs. There’s always a risk that traders are going to sell the news tomorrow and we “gap and crap” tomorrow. I would be careful with any new trades at the open and wait to see how the market reacts to the big move up.

Back in January I talked about how the US Dollar was on the verge of collapsingand recent developments are reinforcing my view. After breaking down from a major head and shoulder pattern in 08′, this currency had quite a violent throwback, causing many bears to reverse their position. Now that the chart (click to enlarge) has resumed the longer term trend, it appears to be in a very dangerous position. Should this pattern play out fully over the course of the next few years, it would ultimately have the dollar being in the 40’s.

Watch the ADX when it turns up and if the red -D1 is still on top, look out below. One other aspect to consider is the inter-market relationship between the dollar and the general markets. A falling dollar has been very bullish for the overall markets lately, but should the dollar find a bottom and rise from here (which is always a possibility), then the markets would be become weak.

Excellent article entitled “Why Do Traders Fail”over at Financial Sense this weekend. I’d like to add a 6th reason to the list and call it “The Need to Win Now”. One could argue that this falls under #2, which is the failure to follow your own discipline, but I think there’s something else here at play that is important to delve into. From the moment you get into a trade, it’s important psychologically to see green on your screener right away, but not absolutely necessary.

Back in May I, along with many, felt that the SPX could reach as high as 1000. Now that we’ve crossed that magic number and you can hear the sounds of champagne being opened around the country, we must look forward. It’s important not to fall into the trap of ratcheting up your targets, believing that this insanity can go on forever, and lose many of your gains when the markets turn on a dime.

Take a look at the chart below (click to enlarge) and I think you’ll agree with me that the sell-off that took place from Oct 07′ - Mar 09′ was fairly severe. Some even may say historic or unprecedented, and yet that entire downturn the most consecutive weeks in one direction was 5. We are currently in our 6th month of positive returns. That in itself should tell you that we need to pause soon.

I’m not sure how this sector didn’t fall on my radar yesterday, but if you’re looking for momentum, look no further. I really don’t understand what our Government is thinking, devoting 2 billion dollars that they don’t even have to what is essentially free money to people who want to buy a new car. Our country has turned into one big handout after another. Don’t people realize that we’re going to have to fund this through higher taxes in the future? And think of the interest that is going to accumulate on that loan. It’s really a trick to get people to go out and spend which is the exact opposite of what you should be doing.

Here is a link to a video describing the pros and cons of the program.

The Dow seems to be stalling like it did back in June. This time could be a different end result as we’re right near resistance and a rejection wouldn’t be unreasonable. I wouldn’t be shorting this until the breakdown occurs, as the trend is still up and a violent upside break wouldn’t surprise me either. I’ve been battling an intolerably hot Vancouver summer, and the beach seems like a better place to be as we churn. If you really want to short, pick a weak sector like the metals and daytrade, but be careful holding overnight.

That’s how the markets fool people though. They do nothing, do nothing, and just when everybody becomes frustrated and let’s their guard down….BAM….they make their move (click to enlarge).

Gold has bounced in recent weeks and appears poised to challenge the neckline it’s formed within the reverse head and shoulders pattern. One aspect of this pattern that bothers me is that it’s so widespread and known, I’ll almost be surprised if it completes the pattern and breaks out. While I don’t invest on a hunch or a theory, I would like to see more supporting evidence that gold is really going to break out to the upside.

Here are a few things that will tell me that the gold bull is ready to get this party started. But remember it pays to wait until the trend if firmly in place before jumping on. As much as it appears gold is going to move significantly higher, it can do the opposite. Everyone was so sure a few weeks ago the SPX was going to breakdown from its head/shoulders pattern. We all know what happened then and the same could happen here.

At this point, with the steam the market has built up I think it’s going to take one of two things to occur before we see this mythic market correction that everybody has been expecting for what seems to be forever. The market is at a tricky juncture, being extremely overbought and refusing to drop. Hitting the beach is always an option.

1. Some significant bearish catalyst. Could be a bellwether coming in with extremely weak earnings. Maybe a terrible government report or more likely additional government interventions in the markets. Natural disaster perhaps…. Yes I’m stretching there, but my point here is that until the market's character is tainted, the up move is likely to continue.
2. Blow-off top, culminating in a huge move up sucking in every last baby bull that has been on the sidelines that can’t take it anymore.

Be on the lookout for either of these scenarios to play out before thinking about shorting.

Shaw Group Inc (SGR) reported earnings that put a damper on the entire heavy construction industry group (click on chart to enlarge). While it’s a little oversold at the moment, this is a sector to watch for a weak bounce and then get short, provided the markets in general remain weak. Others worth watching in this sector are Fluor (FLR) KBR and Jacobs Engineering (JEC).

1. After a bounce off of the 50 day moving average we dropped right through it (click on chart to enlarge). We may bounce temporarily off the 200 day moving average, but now all signs point down.
2. RSI has been in a downtrend since May and the market will have to break this downtrend before any sustainable move up will stick.
3. We’ve had multiple down volume days indicating the sellers are in control. You can see during the rally off the lows there were many accumulation days that sustained the large move. Now the dynamics of the market has changed in favor of the bears.

I’ve often noted to myself and close friends that this financial crises will be over when the Government takes this opportunity to enact a new system of sorts with more controls, regulations, and ways to generate revenues. Now, whether we’re talking about a new branch of Government, new currency, or some other system that I can’t even fathom is up for debate, but have no doubt that something is coming.

That “something” could be giving the Fed new regulatory powers over the financial industry as to avert another potential crises. They’ve already gone on record by saying that they “don’t want this crises to go to waste”.

A few indicators that I follow are starting to crack and look to be heading back down to the March lows. If these indicators are telling us anything it’s that the market’s character is starting to change and the bulls are losing momentum. There is a lot of room to fall here and I wouldn’t want to be heavily long at this point (click to enlarge).

Mobs, Messiahs, and Markets is a thorough and thought-provoking book that provides accurate history lessons, nuggets of common sense, and infinite market wisdom. I would consider it essential reading for practically everybody. It’s sort of like tuning into the history channel that’s sponsored by an independent network, free from the mindless mass media that controls television these days. The reason I say this is because it’s very clear the authors are anti-empires, Federal Reserve, and Government manipulation. They believe that free markets should be just that…free markets.

I was looking at the Dow’s chart last night, tilting my head trying to decide if this is a new leg up or an exhaustion gap and something jumped out at me. This may be nothing, but it’s pretty interesting how Monday has been a very important day lately, which not only helps to set the tone for the week, but also can help identify the potential psychological intentions of traders.

Notice when we were in the thick of the selling at the beginning of the year we had some very notably high percentage moves to the downside and now we’re seeing the complete opposite. As this rally continues to pick up steam you can easily see how if you would have loaded up on stock at the close on Friday you’d be sitting pretty come the close on Monday. Obviously this isn’t the wisest trading strategy, but as long as Mondays continue to be extremely bullish, this looks like another leg up.

Since the Nasdaq has been the index that has lead this rally I think it’s important to focus on it for clues as to whether this rally will continue. A few things I’m noticing that makes the case this parade will continue is when you view the Nasdaq on a 30 min intraday one can see a reverse head and shoulder pattern that just broke to the upside with Friday’s late day burst. While it’s by no means a perfect pattern, it does speak of consolidation and a continuation move higher.

The media tried to put a bullish spin on the housing data yesterday morning and justified yesterday's bullish move by saying the bottom is in and the data couldn’t possibly get any worse. When I look at the XHB I see a very bearish chart pattern and yesterday's 3% move did nothing to suggest otherwise. In fact, we’re seeing a rejection at its 200 day moving average, lower highs/lows and high volume sell off days. This is a recipe for lower prices if I’ve ever seen one and yesterday's move just worked off some of its oversold condition.

I very much doubt this rally can continue much more without strength in this sector. Even the XLF is looking very weak when you look at it on a daily chart pattern.