Gains in the futures melt as do stock prices, but then an afternoon recovery makes the session palatable.

With the Libyan conflict escalating over the weekend prompting calls from Europe and some in the US for a no-fly zone in Libya, and Saudi Arabia showing it needs to order and read some basic history books, we were surprised to see futures holding positive with some decent gains.  Oil was surging, hitting over $107/bbl.  Saudi Arabia, in an attempt to replicate Europe’s 1930′s success in appeasing Nazi Germany and thus lessen growing unrest that is calling for a ‘Day of Rage’ on Friday, released a jailed cleric.  That act shows the rest of the world just how shaky or unsure the ruling family is.  To us that was likely the most unsettling development because if the turmoil hits Saudi then oil becomes untouchable and those of us old enough can compare the next oil shock to the one in the early 1970′s.  Ah the memories . . .

Adding to that, Moody’s, similar to Schwartz in ‘A Christmas Story’ when he breached etiquette and jumped straight to the triple dog dare, downgraded Greek debt three steps at once based upon its belief that the debt reduction plans simply will not work.  If that is the case, why not just come out and say Greek debt is worthless and avoid the Christmas rush?  I guess there is only so far even Moody’s can go at one time in taking down its ratings.

And finally (at least that is where I am stopping), Wells Fargo downgraded the entire semiconductor industry.  It didn’t single one or two out as JPM did when it UPGRADED the entire industry last week; it performed a blanket downgrade based upon that time-tested ‘valuation’ model.  Too high, too fast was the theme behind the cut.

Oil sparked higher as noted, but futures were gamely positive despite all the turmoil.  They held the line right into the open.  Then they melted and stocks sold.  They sold early and they sold often, dropping through lunch.  Then as NASDAQ and SOX hit their 50 day EMA and they held.  Then they started to bounce off that support.  That was followed by a steady rise into the close, or at least up to the last quarter hour of trade, that saw NASDAQ erase 21 points off its low.  It still finished down 39 points, but the bounce off the 50 day EMA and the advance to the close accomplished an important feat: it kept the laggard index on the day inside the recent lateral range, and that keeps the consolidation manageable similar to the November correction.

Quiet day for scheduled data but of course Libya, Saudi Arabia, oil, gasoline, sovereign debt, etc. can all fill the bill as market drivers. 

The feature the market is showing is its ability to hold its lateral consolidation even with the high day to day and intraday volatility.  The longer it holds the range as it flips up and down, the more it works out the need to sell after the long second leg of the breakout run.  That allows stocks to catch their breath and set up for the next move higher.  Very November-like would you say?

As always the usual cautions about assuming it will be just as it was in November.  There are stocks breaking lower that, along with the volatility, suggest there is a significant bit more consolidation to take place before stocks are ready to try a new leg higher.  As they put in their time any of those extraneous issues could upset the consolidation, either extending the time needed or sending it lower in a deeper correction.

For now we do what we said in the alerts today: keep tabs on good stocks that are working in good patterns, doing their own thing despite all of the market fluctuations.  If they can hold up during all of this and set up some nice patterns they will be the ones we want to be ready for. 

As always wait for the play to come to you, i.e. let it finish setting up and then move in when the risk/reward is good along with the action.  It typically doesn’t pay to try and rush the process by moving in too early.  Doesn’t mean you won’t do it anyway; we all do.  Just outline your plan and stick to it as best you can.  If the plan is sound and you follow it you will make money.  Maybe not on every trade but overall you will be playing quality stocks and quality patterns, and when they win they will win nicely, and when they don’t you won’t get dinged hard and you will be ready to put that money back to work with the next good play.