Still Cautious About This Rally

Includes: DIA, QQQ, SPY
by: Jeff Pierce

I’ll admit I missed out on yesterday's rally completely. I kept waiting for a clearer bottom formation to appear and it never showed up. When the market opened higher today I just watched from the sidelines as it roared into the close, thinking the markets would sell off. I suspected on Monday that we may be drawing a line in the sand, but didn’t act on it at Monday's close, fearful of more downside. That’s all in the past and one must focus on what is happening now.

Yesterday was strong, as volume rose across the indexes, however there are some glaring problems with where this rally is starting from. The Tick is at its highest level ever, indicating overexuberance on the buy side. Yesterday’s action will be irrelevant without some constructive backing and filling. If we open strong out of the gate, I could see us moving another 200 points before encountering some resistance. This, in my opinion, is the worst case scenario for longs as I would then expect a strong reversal.

However if we drop and fall constructively, we could then climb a wall of worry and maybe we could possibly get a decent trading rally. The put/call ratio is still pointing to the option players being very bullish. Traditionally they are wrong at important turning points. I shorted a few stocks at the close with very tight mental stops and will be quick to take profits should the market drop at the open. I would be very careful getting too long here as all signs are still pointing down as of yesterday’s close. This could change over the next few days, but be aware of all the “bottom” callers out there. The more times you hear this, the more likely this rally will fail very quick.