Wait Then Strike

Monday’s slight distribution is followed by Tuesday’s accumulation.

With a week-and-a-half to go in the year, we continue to see the market as cautionary for buyers, and see no reason to do anything.

And yes, doing nothing in trading is just as important as buying or selling. The idea is to wait for all the signs to align in your favor then strike.

The spook factor

Major indexes and sectors struggle under their averages.

But with selling volume potentially drying up there’s a bit of hope for the Bulls to finish the year strong.

The Follow Through Day (FTD) from two weeks ago tells us that institutions were willing to step in and support the market.

While all major rallies begin with FTD’s, not all FTD’s signify a major rally.

There’s still plenty of reason to sell this market.

To put it bluntly, this tape sucks.

What we mean by ‘tape’ is news, and more importantly, the market’s reaction to news.

The Fed’s action last week was poorly received.

Not even a rate cut or “special” lending program with foreign banks could inspire buying.

The “special” lending program to inject liquidity into the banking system left many thinking The Fed is uncoordinated, and trying to do what it can to save the market.

When markets are bad hope always lies on the Fed, and when the Fed begins to look bad it only makes matters worse.

And the worst matter of course is the credit markets.

The fact that the amount of losses from mortgages and CDO’s is unknown is a major concern.

Most of the major banks continue to fumble around the issue with lack of transparency.

Anytime uncertainty factors in, markets get spooked.

The Financial’s are just off the lows of the year and pointing down.

Other key sectors such as Semiconductors, Retail and Transportation are also struggling well below the major moving averages.

We’ve relied heavily on our price and volume indicators for guidance, but right now we have to recognize that our one hope with an FTD appears to be on its way to being rubbed out.

Benefit of the doubt

The Dow and S&P 500’s look vulnerable just under their 50-day averages, but we have to give them the benefit of the doubt as volume indications tell us they’re being sponsored by the institutions.

But considering the market can’t seem to get it going after the Fed’s action this week, it’s hard to see what might inspire buyers to muscle price action higher into the end of the year.

The good news is we don’t have to do squat

A wild day for the The S&P 500 spells out a technically bullish performance after accumulation sets in.

But from a Tape Readers perspective we see today’s action as not that supportive of the Fed’s plan to use foreign banks to create a lending window to troubled banks.

The good news is we don’t have to do squat. We want the market to work out its bias issue on its own. Whether it ends up trending up or down will be better seen toward the end of the week – we hope.

Clearer the day after

Heavy distribution on the back of the Fed’s annoucement gives warning.

But the true trend of Fed reactions is usually clearer the day after the announcement.

While we have a bullish Follow Through Day in the books from last week, all it will take is a few rounds of heavy selling to take it away.

We’ll hold our Green Flag bullish bias unless we see today’s action pick up momentum.

S&P 500 ragains its 50-day moving average

The S&P 500 ragains its 50-day moving average.

Our bias turned Bullish yesterday as the Nasdaq and Russell 2k put in Follow Through Days. This tells us institutions are willing to sponsor the market.

All we can say is this is a better environment for longs than it is for shorts.

At the end of the week we will have a better grip on how Leadership is stacking up. No rally is worth much without the baking of its leaders.

Follow Through Day

The Nasdaq and Russell 2K each rallied more than 1.7% on heavy volume to qualify for a Follow Through Day.

This means insititutional buyers are in support of this market. The path of least resistance should be up for now.

We’re not making any claims that the recent lows will be permanent, but merely recognize this end of of the year market environment as Bullish.

Only distribution through heavy selling or a collapse in leadership will chage our bias.

Modest Pullback

A modest pullback at the S&P 500’s 200-day moving average comes on light volume.

That’s good news for the Bulls who want to see selling volume dry up.

What’s important now is not to over-analyze from day-to-day. We are looking for the market to tell us how strong it is, and are not interested in jumping in until more evidence of the trend’s strength becomes apparent.

Follow Through Day?

Friday’s high volume marked good support for the market, but not exactly a Follow Through Day.

But Investors’ Business Daily sees things differently as they have changed their criteria for an FTD by counting their New America and 85-85 indexes as giving an FTD instead of one of the major indexes.

The traditional definition:

Developed by William J. O’Neil, a Follow Through Day is an indication of a potential change of trend in place. After the market has made a new low and a rally has been attempted, a follow through day will be identified when a major index closes up 1.7% or more for the day with an increase in volume from the day before. A follow through day can only occur between four and seven days from a potential bottom.

We’ve changed our bias to Buyers’ Caution.

To be honest, we’ve been ahead of IBD’s calls in the past, and see some problems with the technical situation of the market.