We are in the middle of a launch from a correction that started in mid-January with a nice bounce off the bottom here. But what now? Is there a trap here? Is it a bull trap or a bear trap? Don't let the fear paralyze you into inaction which is also a trap. There is no doubt that the bulls have been controlling for the past week or so but they are showing signs of weakening but on the other hand the bears have not been able to foster much damage yet. At the end of this piece I will show you two possible scenarios and what to look for intraday to see which is coming to fruition.
First the world:
Asia
China continues to play catch-up after last weeks closure with a nice rally at the close to be up over 1% on the day following a nearly 2% gain yesterday. Japan also strong yesterday consolidated its gains today.
Europe
Europe sold off right out of the gate and is sitting on the lows of the day. If you look at a futures chart it tells the tale of the night. ES futures were up over 4 points during the Asian market and now sit down almost 4 points in sympathy for the European market.
United States
Economic news
A lot of housing data is coming out this week and the Case-Schiller starts us off this morning as we continue to look for a slow down in the loss of value of our houses. I am looking for something that might launch the next stage for our rally and maybe it will be in the housing data this week.
Earnings
Lots of earnings still coming in.
Breadth Charts
40 DMA % Index
Down to the charts. Still a +6 on this chart. Watch that curl on the NYSE if it turns down we begin to suspect weakness is creeping in. The 20 DMA is starting to move up so now the race begins as the 20 DMA puts pressure on the index to keep moving higher.
10 Day High - Low
This chart scores only a 0 today. A neutral score because the weakening of the daily bars which are all lower than the day before. A day of rest or the start of a failing top?
52 Week New Highs
The 52 week new highs are so strong. That is 10 days of higher bars on the NYSE. The Rut and Naz took a break during the run but the NYSE has remained strength throughout. The chart scores a bullish +6 and shows that there is real structure under the markets.
Conclusion
| Chart | Score |
| 40 DMA % Index | +6 |
| 10 Day High - Low | 0 |
| 52 Week New Highs | +6 |
| Total | +12 |
The charts score a +12 today which is still bullish. I often talk about structure under the market as I view a rising market as a Jenga game. The game where you remove a single block from a rickety tower one block at a time until the entire tower collapses. When the game first starts there is a lot of structure around to hold up the blocks. As each piece is removed and the structure is weakened eventually you get the collapse. You know that you are close to the end of the game when the tower wobbles to and fro with each piece and you are always amazed on how much of the structure you can remove before you get a collapse.
This market right now has a lot of structure behind it. Fundamentally the economy is on an upward trend, unemployment on a downward trend and we are better off now than we were 12 months ago. Technically this current rally we are having has built up a lot of supporting structure. Look at the 52 week new highs and how they are ramping up. The Russell has moved from 20% of symbol trading above their 40 day moving average to 60% of stocks now above their 40 DMA. The NYSE has move from 56% more stocks putting in ten day lows than highs to now where 34% of stocks are making 10 day highs than lows. That is a lot of positive breadth and a lot of structure.
But like the Jenga game as the structure starts to be removed the markets will begin to wobble and my job is to watch for the wobble and to measure the strength via structure. Yesterday we see that the 10 day high-low chart put in a weaker day than yesterday. That is a piece of structure that is now missing. (Unlike Jenga we can add strength back in so maybe today it will be corrected).
I spent a lot of time last night just looking over charts and when markets fall apart. There is always plenty of warning except for the exceptional news day. That fear you will have to handle yourself. Lets look at the NYSE 10 day high minus low chart across some periods, first looking at the data from when we entered this current correction from mid January:
Moving through the time sequence look at A. We suddenly loose a large share of our 10day high - low structure. B the market fights back to higher highs but with much less support (lower 10 day number). C if you are still in the markets looking for upside watch out because the tower is falling. The markets gave us plenty of warning here that a top was in place. [We sent out an email pointing out the XYZ top and the likely hood of failure to go higher].
So while we may get trapped by a single day event, complete market failures are predicated by weaker data. Yesterday's lower 10 day high reading does not mean we are necessarily rolling into a sideways top, but it does mean we need another thrust to get the momentum going again.
If you look at the long legged bull runs you can see how the markets have to have multi-stage thrusts to propel the market prices higher.
Here is a look at the same indicator on the rally out of the June/July correction:
A. Initial thrust off the bottom (notice that this chart turned from bearish to neutral the day before the thrust A and scored a +2 bullish on Day A with both a higher bar and upward moving average). The bars build for 4 days then have one day of weakness before hitting a peak and beginning to fall off.
B the second thrust launches the second stage and we drift sideways until C a third thrust sends us to the eventual top. The momentum gained by the 3 firings was enough to keep prices up throughout period D on the charts which was the topping process which was answered by a mild correction and another thrust up.
Let's look at one more example this time the August/September rally:
Period A. The initial thrust off the bottom and a building period with blow off thrust B followed by a weakening period of 10 day highs and market high chop a attempt at a new high C with a lower weak 10 day high, this told us the top is in place and days of weakness ahead.
Time to bring it home and a look at our current thrust:
Point A this chart turns bullish. B we get a thrust day and begin to build even higher 10 day numbers as we march up. Now we are either going to get another thrust upward to continue or a drift down of 10 day highs while the market chops sideways until eventually following apart.
This doesn't mean we won't have down days but that most likely down days will be met by rally to the previous highs the next day. It also means trust in the bulls for now and don't short a strong market with lots of structure, wait for weakness to show and right now the market is showing strength.
$SPX
Yesterday the bulls took the day off and failed to put in a higher high. That shows weakening or resting but alas one day does not a trend make. Today will be a real test as we are going to start off behind the starting line with a gap down most likely. This should stunt the 52 week highs and 10 day high-low index unless the bulls show some fortitude out of the gate here.
Bulls Plan: They have gotten themselves into a corner with the breaking of 1106 this morning on the opening. They need to show that the markets are mis-priced here and reject it outright with a run up into the 1108 area. (for disclosure I am on their side an bought in futures pre-market excepting some strength at opening). A break of 1112.50 should start to make the bears have doubt about regaining control and 1114 should be their goal in the next day or two. To keep the market momentum going here the bulls are going to need another thrust day (a 20 point SPX day). This will have to be news driven so pay attention pre-market and around the news release times.
Bears Plan: The bulls have been stopped here short of making a new high. Continue to push and not allow today's gap to close. The longer below 1106 the better and better yet back to 1101 and 1100. The bears have the extra yardage today let's see what they can do.
Good luck in the markets.
Marlin aka (RedlionTrader)
