- Three day bounce ahead of a three day weekend shows stocks are still alive and kicking though still solidly in the trading range.
- Dollar hits an interim top and rolls, dovetailing with the reasons for the bond rise.
- Spending and Income lackluster but Michigan sentiment jumps.
- Pending home sales tank but that is hardly news.
- G8 Economic Summit leaders issue their solemn vows. Grand words.  Meaningless words.
- Indices look as if a pullback in the range is ahead, but light volume next week can be a stock’s friend

MARKET SUMMARY

Indices put in a 1-2-3 rebound bounce, aided by renewed dollar weakness. Lots of weakness.

Stocks managed to put in a third day of a rebound to cap the week following a very weak start. They fell back into their trading range on Monday, giving up the ABCD pattern and the attempt to continue the breakout from the inverted head and shoulders that formed from the February high into mid-April. Something of a 1-2-3 rebound similar to a 1-2-3 pullback. Stocks will often rally nicely and then stage a 1-2-3 pullback. That third day marks the end, and then it bounces back to the upside. Now we have a fall back into the range after three failures to take out those prior highs and extend the rally. That can mean a bear flag that leads to more selling.

I will be watching that as next week unfolds, but the action was not that bad overall. Buyers showed back up immediately after the indices fell back into the trading range, and that is a good thing. There was some buying on the dips. It did not win out the day. Nothing changed the character of the market after falling back into the range, but it shows that maybe the indices can avoid a stronger selloff that takes it through the bottom of the range. In other words, perhaps they can consolidate, base out, and make a new break to the upside.

Futures were higher in the morning, and they peaked right at 8:30 eastern time as Personal Income and Spending for April came out. That somewhat eroded the gains, but stocks rebounded again. They were doing quite nicely until some more economic data came out that was mixed. The market would not be denied, however. It continued higher after that first hour, and it managed to rally nicely positive. Even though it eroded much of the day, SP500 still managed to bounce in the last hour and put together a decent gain. Again, it was the third upside in a row after that fall back into the trading range. NASDAQ, +0.5%; SP500, +0.4%; Dow, +0.3%; SP600, +0.6%; SOX, +1.1%; NASDAQ 100, +0.44%. Some of the large cap techs continued to struggle while the smaller caps tended to work better.

It was not a fantastic move to the upside, but it was a good third day in a row to end and week ahead of a long weekend. There was not any real inclination to sell the market off with worries of what may happen over the weekend. That is another indication of a positive bid under the market still holding it up. Of course it was not enough to break it out recently, but it is not letting it tank either. Note that both NASDAQ and the SP500 moved back positive above the 50 day EMA, though there is still significant resistance from prior tops and some lows in the near future it will have to deal with. That always happens when a stock or index falls back into a range or gives up a breakout move.

TUESDAY

The monthly unemployment report should be out because it is the first Friday of the new month. With the holiday, however, we will have to see. The government has not said when it will release that data. It may be pushed to the next week, but there will be other important data out   the Case/Shiller and the Challenger job cuts report. We will see the ADP report out as well. Then we will have another important piece of manufacturing data, the Chicago PMI. It is expected to fall considerably, and that would be in line with what we have seen in the other reports that have come out recently.

What about the market itself? I talked about the 1-2-3 rebound from the selling back into the trading range. It gave up the breakout, gave up the attempt at the continuation of the breakout after the test, and then the failure of the ABCD pattern that bounced and rolled over. Now it is back up over the 50 day EMA, but the indices are at serious resistance nonetheless. Frankly, to me it looks a lot like this is just a little 1-2-3 bounce to the upside.

Volume will remain light next week because it is Memorial Day week. It is a four-day week, and that means people will be out on their holidays. Light volume can be a friend of the trend. Overall, even though the indices fell back into the trading range, it means the upside bias is still there even though they have taken it kind of hard near term. Where we would be expecting a pullback, there may be a continuation of the rally back toward the February peak   at least on SP500.

We did not buy a lot of Friday. We bought significant positions when the market fell back and the leaders showed they were holding support. We bought into some of those leaders, and we bought into several positions because there were several good stocks making moves. Friday we picked up a few. We let some go that maybe we should have gotten into, but it is just that Friday situation. I felt like there may be a better chance to pick up some of those early next week if things should fall. Remember, we are looking at the VIX. It is not the primary indicator, however; I do not want to imply that the VIX is leading my analysis around by the nose. It is showing the same kind of action that it did on the last selloff, and that is something to consider next week.

I think we might get some better entry on these stocks that we did not pick up at the end of the week. That is fine. Again, you have to be aware that light volume can allow the existing bias to extend beyond what you would normally think it could do. That might mean that the indices continue higher in their range. If they do, that is great and we will let our positions run. We will take some more gain off of the table. With the bounces that we got off of the lows starting on Tuesday and Wednesday, maybe we can already bank some gain on those. We have had some good moves on those stocks in a short period of time. That might let us bank some money, and I would be more than happy to do that and then see if we get that pullback.

What has happened on Wednesday, Thursday, and Friday? A rebound. Has it changed the character of the market that fell back down into the trading range? No. Beyond that, has this drop into the trading range automatically changed the entire bias of the move? No, it has not. There is no breakout now. There is a question as to whether the market will base out and try to post a new breakout, or base out and fail, or just forget about basing out and fall through the bottom of the trading range.

The fact that it rebounded Wednesday through Friday is a good indication that the buyers are still there and are not giving up. They will try to base out the indices and maybe make a new break. The fact that there are many good, high-quality leaders that held close support and bounced Wednesday, Thursday, and Friday is a very good indication that the upside bias remains. It is all very positive even though the indices tumbled back into their range this week.

That means we will continue to look for opportunity. On this bounce to the upside, we will be ready with some downside plays on the SPY, other indices, and other stocks that bounce to the upside. Some of our downside plays made strong moves at the end of the week, but they started to top out where you would expect them to. They showed a little toppy action even though they were up on Friday. With the VIX showing that action, it is worth waiting to see if there is a fade next week. Light volume is the wild card, but technically it looks like the markets want to go back and trade in the range some more.

We may not get buys right away. It may be a bit in the future that we get some more good buys and better entries, but we can be patient. We have great stocks in great positions that are working for us. We can let them do so. At the same time, we can look to play shorter term, maybe on a test back from this 1-2-3 bounce from the tumble back into the trading range.

Have an excellent three-day weekend. I hate to lecture, but do not forget that this holiday is about those who have died in defense of this country and in preserving those truths that we hold dear; that we have certain inalienable rights that are given from the Creator. The government cannot give those, and it cannot take them away. They are ours, and our Constitution memorializes that along with the other contemporaneous documents such as the Declaration of Independence. Remember the millions who have sacrificed for those rights. Given the trials facing our country right now, it is especially important that we reflect upon what the future holds and what we need to do in order to hold onto those rights.