- Stocks sell further to support and hold. Now can the market put in more than a single day bounce?
- Jobless claims ‘fall’ to 414K! Surely time to rejoice.
- Philly Fed manufacturing turns negative, the second region to do so.
- Housing starts rise in a wholly, for now, meaningless report given the other circumstances.
- SP500 doji at key support. NASDAQ doji at key support. You would think a bounce was coming . . .

MARKET SUMMARY

A further selloff to key levels, a ‘reversal’ of sorts, and next . . .

Thursday was interesting. There was more bad economic news and more downside, but the indices held at key levels and tried to bounce. Will we get another bounce to the upside? Will we get another bounce to the upside that is just a one-day wonder that fails immediately? Maybe this is finally the point where the market reveals an oversold bounce that lasts a few sessions a more typical relief bounce you see in this kind of selloff when the market appears to be topping.

The pattern we have experienced over the past five months is not the same as the summer of 2010. That summer was a sharp top that rolled over quickly. It was a deep selloff, no doubt about it, but it formed a base from May into August and got help from the Fed when they announced QEII. That launched a tremendous rally, a double run from late August into January of 2011. Now we have a topping pattern. It tried to base, forming another head and shoulders from February into late April, and it made a breakout. It failed, it tried again, and it tested it. It tested, rallied, but then failed. It formed an ABCD pattern. It rallied off of that D point, but it could not get past the February peak. It made one last try and then tumbled sharply over the past two and a half weeks.

Thursday showed a doji at the 200 day EMA on SP500. We have a doji on NASDAQ at the March low. Those are key levels. Again, will this lead to a bounce? Will it lead to a one-day bounce or to a rebound that moves the indices back up into their range, maybe forming the right shoulder to a head and shoulders pattern and then stalls? None of those options, of course, include a breakout to a new rally high. The economic data simply does not support that. The bond market rally does not support that.

I do not have great things to say about the future. Our economy is in great jeopardy. I do not believe this is just a summer slowdown equivalent to last summer. It is a false hope that a lot of analysts are looking for in terms of corporate profits; most of those profits are with the overseas multinational companies that sell their products to growing economies in China, Indonesia, Brazil, India, etc. There is no home-grown demand. We are not creating jobs because those companies do not create jobs they are shedding jobs. We are not looking at increasing our employment rate in any significant manner. There are issues still ahead for our economy that will cause a lot of trouble.

China may start to stumble. It looks like it is doing that based on its stock market selling and the continued attempts to control its inflation that is running wild. Perhaps if Brazil and India do the same, than your export economy suddenly does not look so good. The administration and others trying to bribe companies to hire people will fail horribly in that endeavor. $5,000 is no reason to hire someone who you have to pay $50,000 a year. With the problems they see coming with uncertainty, unless we get some different election results in 2012, I do not believe there are a lot of positives for the economy. We will through it similar to a 1970′s-style malaise. Of course the stock market did have some nice rallies up and down back then. You can make great money in the market during those times. Everyone is so downbeat that they do not realize the opportunities in front of them. You can make money when it goes up or down; you just need the right mindset to do that.

The futures were down early, but they started to come back when the jobless claims came in and were not as bad as expected. They were still above 400K for the tenth straight week. That is hardly something to be excited about. Housing starts were higher by 3.5%. That also helped push futures back up, although that is an absolutely meaningless statistic. In fact, rising housing starts is a negative in my view.

There were a lot of other issues, but the market seemed to overcome them. It rallied early. The Philly Fed came out negative. It was very bad. The market was knocked back on its heels, but it rallied back up. There was some late selloff in the afternoon. It took the indices negative, but it did rebound late in the day, and it showed that doji on the NASDAQ and the SP500. Those are interesting patterns that could lead to a relief bounce. The 3-5 day rally that we were looking for typically happens in a selloff. It has been a long time coming. Enough people are jaded right now to where such a rally can occur, but it remains to be seen.

The most important fact is I do not believe it will make any difference in the indices. I do not think it will sprout any new highs out of this. It will just be a relief bounce that takes the market up to some prior resistance points where it likely rolls over again. I am just reading the economic data and the other markets to come up with these conclusions. Of course they are only conclusions we make about the market; the market always does what it wants to do no matter what anyone else thinks. The if that was not the case, the rally off the March 2009 low would have ended when everyone thought it should have ended. Instead it more than doubled the move from there.

What the pundits think, what I think, and what the traders here in the office think does not really matter. The market will show us what it will do. It behooves us all to pay attention to what the market says, and then act accordingly and make money off of it. Right now we could get that rally to the upside to make us some upside money. Then we will look to make some money to the downside like we did with CAT or our SPY puts on this last decline.

It was a mixed market on the day. NASDAQ, -0.3%; SP500, +0.2%; DJ30, +0.5%; SP600 +0.35%; SOX, -1.15%; NASDAQ 100, -0.4%. The NASDAQ 100 was down more than the overall NASDAQ. It had been struggling as technology has been one of the laggards. We will see if it can be one of the leaders now at least in the rebound off of that doji at the March low.

My discussion of leadership spells out what I think might happen tomorrow. It is expiration Friday, so it could be a bit up and down. However, I think we have already seen most of the fireworks with the increased volume over the past couple of days.

Michigan Sentiment is out about a half hour into the session, and Leading Economic Indicators are on their heels. I do not put too much stock in these LEIs. They are expected to go back to positive from negative. I would put more credence with the ECRI numbers simply because they are accurate. They have been accurate for years. They do not spell positives for the economy, but even before their report came out, we all knew that. We were tracking the important areas. We had seen the turn in the data almost from January 3rd when the market started to trade once again after the holiday season. The numbers are continuing to head lower. I do not think there will be too much impact from these numbers, although Sentiment always plays a role because people want to see consumers feeling better about what is happening in the world.

I think we have a technical set up. Will the indices please stand up? Will SP500 and the NASDAQ finally make a move of more than a one-day bounce off of a support level? They are at levels of more import than they have been on the way down. Notice that they have gotten very bouncy and choppy as they have approached the 200 day EMA and the March low. Very back-and-forth action. Volatility broke out the VIX to the upside as the day-to-day volatility ramped up, yet they have held key levels.

We are looking for a bounce here. Of course we have been looking for a bounce all along, and we had some stuff slapped back in our face. That is what happens. You look for good risk/reward plays (those that will not kill you if they go against you), and you make a run at them. We picked up some SSO today because of the SP500 action. The SSO is at its 200 day EMA and basically at the March low. It put in a doji as well.

We are looking for a bounce. Will it bounce? After that, the question is whether it will hold and actually give us a relief move. I do not know that, but I do know that I like the setup here. If you see the setup, you need to play it. Just as we saw the setup on CAT and the SPY to the downside and played those to the downside. You just have to do it when you see it. Now we look at the SSO. We may even look at some more QLD and try to pile some more in there and see if we can get a move to the upside. It is similar to WHR. Maybe even AAPL is good for a play to the upside.

There are stocks that have sold, and they are at support and ready to bounce. The indices have sold and they are at key support. They are putting in the kind of candlestick indications that they will try to bounce. Then the question is whether they can hold it. We will find out for sure. The key point is, even if they do make the move, do not fall in love with the move. If SP500 breaks through back into its range, that is great. Let it run, but do not expect it to go over the February peak. If it does, you can knock me over with a feather, but I will not gripe about it. We will be playing a move to the upside based upon what we see as a good risk/reward entry point.

I do not know if it can hold the move, but I see the chance to make money. We want to make money on the bounce. If we see it failing or faltering, then we want to take what we can off the table and play the downside. We probably will not have a lot of new plays tomorrow; it will just be those that we will try to bounce. We have already picked up positions on those because we were watching them and anticipating this. We were picking up positions on them as they started to bounce. We will see if there are any others we can add to it. Maybe we will get a 3-5 day run to the upside, and then we will reevaluate.