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Can News Trump Technical Analysis?

|Includes: Apple Inc. (AAPL), SDS, VZ

The simple answer is yes and that is one major reason why I am not gambling on the news tomorrow.  Technical analysis helps identify trends to help guide investment decisions but, TA should never be the sole tool used in making those decisions.  Fundamentals play a role even though not much of a role in this year’s market.  News and market sentiment are playing an even more critical role this year.  The news combined with the market sentiment is creating significant volatility that we continue to see.  This is a very news-driven market and Friday should prove that to be true.

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Thursday was a solid follow-through day that the bulls were looking for.  We did not have solid volume but we broke resistance levels and trended higher into the close.  What was very shocking was how the bulls were willing to gamble so much by pushing higher into the close knowing the important news being released tomorrow morning.  It almost feels like some type of setup rather than a bullish move north that we can trust.  Bears don’t convert to bulls this quickly coming off one of the highest bearish sentiments since the reversal in March 2009.  Maybe somebody knows something we don’t though?

REQUEST CHART ANALYSIS

While we are still in a trading range, per the monthly chart, we are now in the uptrending part of the range.  Under normal circumstances, I’d be an aggressive buyer today but tomorrow’s jobs data is not something to gamble on unless you already know the results.  We can expect very significant downside tomorrow if the numbers are worse than expected with moderate upside and many resistance levels.  With ADP employment numbers showing significant weakness, I would not be shocked to see Friday’s figures coming in weaker than expected.  Even if numbers come in slightly better than estimated, that’s not a good sign for the economy.  However, the markets should rally on any expected or better-than-expected news.  A rally would have the bulls testing the next resistance level of 1100 on the S&P 500.  I reduced some of my shorts today on the surprising bullish afternoon. Most any seasoned trader would have anticipated market players taking risk off the table and not gambling on tomorrow.  With such low volume, I can’t imagine it was short covering either.  The close was unique, to say the least.  Friday may shed more light on why we saw the close we did today.

You can color me more bullish now but, I still refused to gamble on the news Friday.  We have no edge in knowing the news therefore that’s a losing trade.  As stated earlier, I reduced some of my shorts, particularly in ProShares UltraShort S&P 500 (NYSEARCA:SDS).  This ensures I stay equally hedged for tomorrow while sitting in high levels of cash and ready to move in either direction.  I did add a new long position that I am familiar with in Verizon (NYSE:VZ).  VZ announced today that it increased its quarterly dividend by 2.6% to $.4875 per share and I couldn’t pass that up.  We can also expect to see more rumors of Apples (NASDAQ:AAPL) iPhone coming to VZ so we may see some minor boosts to the stock from the rumors and an even bigger boost if the rumors turn out to be true.

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After tomorrow’s news is released, I’ll look to be more active again.  We should see more clarity in the direction we are going and I’ll look to deploy more cash at that point in time.  The markets tend to react more volatile to news that is unexpected rather than what is expected and already priced in.  Time will tell if the jobs are bad or very bad.  We have priced in the bad as the estimates are not good but, we have not priced in the very bad.  If tomorrow’s reports confirm what we saw in the ADP employment numbers, I expect an ugly day. If not, let’s hope for a solid follow-through to finish the week and confirm the uptrend before the holiday weekend.

As always, do your own homework to see if you agree.  Have a good night and I’ll see you in the morning.  Good luck out there.

Mike

At the time of publication, Kudrna was Long SDS and VZ but positions may change at any time.




Disclosure: Long SDS and VZ but positions may change at any time