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The market wrote a great script. Good news has gently stroked the market for at least the last two weeks. We first had a quick rally in mid-August. For example, in 4 days, the NASDAQ gained 4.2%. The market stood its ground over the next week and churned and consolidated its way into "oversold" territory as the market digested the quick gains. The indices dutifully responded with another rally over the past week. A lot of this action has occurred with summer's typical low volume, but this has not stopped the bulls from celebrating. How could they not? Almost all the economic data points seem to be pointing to a stymied Fed and the much storied "soft landing":
Now, the bulls usually like to remind us that the markets climb a wall of worry. Lately, there has not been much to worry about, so we have to wonder whether we have just seen a small respite in the storm. Certainly, we are now approaching the seasonally weak months of September and October. But trading the day after Labor Day should determine the market's short-term mood. If my guess is correct that the latest rally is just about over, then I would expect to see either vigorous selling on Tuesday, or, perhaps even worse, a sharp morning rally that sucks in the last bulls. This move would get faded just as strongly in the afternoon, or get faded over the rest of the week. I hate to make an absolute call on a market that is undergoing some kind of a transition, but I cannot help be wary when I overlay the technical picture. Two weeks ago, I wrote about the coming final phase of the rally. The market has so far followed the script. We have rallied right to critical technical levels just in time for a traditional Sept/Oct sell-off. Let's review (this review assumes you are familiar with the previous posting and/or the technical terms used here):
So, there is still some room to groove, but it sure seems like a poor time to initiate new longs. It is definitely time to shake the dust off your selling plan/strategy if you have not already done so. I do not know what event or catalyst will erase the recent optimism and good cheer, but it may not take much given the light volume of the past few weeks and the strong resistance levels waiting overhead. Of course, if the market manages to conquer all these warning signs, well, then I will have to jump right back on the bullish bandwagon. In the meantime, be careful out there! |