The Next Market Phase?

  • Posted by
  • on November 1st, 2011

The market tone has changed a ton since my last update.  While I mentioned planning for crazy scenarios and used 1225 and 1350 as my risk and reward levels for $SPX, the events have unfolded far differently than I had imagined.  We’ve failed to do the following things I thought would happen:

1) Consolidate October’s gains in a tight range

2) Establish a higher weekly low to go with the prior 3

3) Shrug off bad news from Europe

This takes 1350 off the table, in my strong but weakly held opinion.  At the same time, this doesn’t have to mean a nasty retest of the October 4 lows below 1100.  Stocks still have a few significant achievements on which to (re)build:

1) A continued ability to reject the 10 week long magnet that kept markets cycling around 1180

2) A healthy reading of 72% of stocks above their respective 50 Day Average, a number higher than the 68% recorded when we tried breaking above 1235 on October 18

3) A sharply rising 20 Day Average backstopped by a flat to rising 50 Day Average

I see a ton of price memory between 1190 and 1260 that will probably keep us balanced for awhile.  That doesn’t make me bullish or bearish but simply ready to act on the next evidence.  A breather was needed once every stock in the universe surged above its primary averages, and now that the tree has been shaken I see no reason why quality stocks can’t charge ahead at the expense of the weaker ones.

It’s hard to spot true leadership in a Correlation 1.0 market full of 90% days, but even a few days of sideways action inside this range will allow us to see quite clearly which stocks can follow the emotion of October earnings with a methodical march higher.  While “the market” may not broadly deliver a 10% year end rally to all players, I think buying large cap stocks that make higher highs this month will pay off in a mad rush into quality, “need to own” names.  $AMT is showing itself a worthy candidate today, but it’s only Day 1 of their post-earnings life.

This 2 day dent will now make it easy to see which ones can emerge from post-earnings drift by making new highs without the tailwind of a rip-roaring market.  From an incredibly extended Thursday reading close to 2ATR above their short-term evolving value areas, most big stocks were an equally extended 2ATR below the same markers this morning.  That satisfies the value element of new purchases.  Today’s back and forth range in the 1220s is doing a decent job satisfying the memory requirement.  What’s needed is some momentum, which is still pointing the wrong way for most stocks…let’s see if tomorrow brings us an egg or a tennis ball(forever HT to HertCapital for that visual I keep stealing!).

The information in this blog post represents my own opinions and does not contain a recommendation for any particular security or investment. I or my affiliates may hold positions or other interests in securities mentioned in the Blog, please see my Disclaimer page for my full disclaimer.

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