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Wednesday's Market Outlook 5/5/2010

Bottom Line: If not for all the negative news, we would be more aggressively short. We are looking to cover existing short positions and will get long for a bounce as soon as we see signal evidence justifying such a move.

We are on record saying that Bonds and the Dollar would rally and not to trust Crude’s breakout. At the time we could only tell you what was going to happen, but not why. Now, we understand why (Greek debt fears, BP's Oil Spill, etc.). As a result of the news the tape is getting hit, and these commodities are now approaching our targets.

Greece is melting, protesters are being shot at, the Gulf spill is killing the energy space and all this in front of Friday's jobs number. If not for all the negative news (and fear) we think the tape would be a lot lower. It’s possible we will reach these lower levels, but our sense is that we will get some relief fairly soon.

Meaningful tops aren’t made this way. The recent selling is a result of what’s been building for WEEKS, not days. Tops are a process (trapping the dip buyer) and finally we have people trapped. They get nervous and sell.

Short-term, we think the dip buyer is available to buy, but is too scared to do so. Once any good news hits, we will bounce. The “tell,” signaling us that a bounce is upon us, will show up as a bullish divergence in the internals. At yesterday’s low, we saw really awful breadth and extreme down volume vs. up volume. We think the internals won’t be as bad when the final flush is seen in the wave cycle.

The market has changed character and not just overnight. What would confuse the most amount here is a rally on the heels of this morning’s weakness. Our short-term targets, based on this flush, for the SPX are $1162 to 1151. We expect to be buyers down there if the conditions are right.