March 27th, 2009

Time to Take a Break?

Until March 9, most of the conversation centered around the market careening down to 600 or 500 or 400. And then Doug Kass went on Kudlow’s show and called it a “generational low” and the market really started to take off.

Has the 23% gain since, a move that qualifies as a “bull market within a bear market”, resulted from short sellers deciding that there was more risk that the market would go up than reward from its going down? Or is it that all those individuals and institutions sitting on the sidelines with hordes of cash deciding they should put some of their money to work because there was now more reward in the market going up than risk of its going down (I know it sounds confusing but read it again and you’ll see the difference)? It was probably a combination of both.

Here are things to watch out for:

The market has successfully crossed above 2 resistance trendlines that stretch back to the 2002-03 Tech Bubble Crash and above 2 moving averages, the 90-day today by just a hair. But the next hurdles are significant.

First, the Index is resting on what would have been the apex of the symmetrical triangle that it broke below in February. While it made a V-shaped recovery from the decline, the apex often is a place where it could stall.

The next hurdles to cross (the trendlines at 893 and 985) and the 180-day and 300-day moving averages are leagues away (7& and 18%, respectively). The market will, in all likelihood need to take a rest before attempting that assault.

But whatever the explanation demanded by those who need one, I’m beginning the think that just about now that both the short sellers will temporarily stop covering hoping they’ll be able to buy again at lower prices, the traders will start selling some of their long positions to lock in huge percentage profits and the still large sideline cash balances will hold off from additional purchases in the hopes of buying as the market takes its breath and prices stabilize or decline somewhat.

It’s just about here, at what would have been an extension of the upper boundary of that symmetrical triangle, that moves tend to stall out (850-920). Buyers and sellers might maintain an equilibrium constraining prices within a narrow range. Short sellers (few long-term holders remain and are looking to unload at this point) may overwhelm the new money coming in from the sidelines and make a last attempt to push prices and the index lower.

But my guess is that, seeing the underlying strength of many individual issues (take a look at the breakouts posted by many of the stocks included in the spreadsheet in referenced on March 19), it will be a short and steep. When it runs its course, I’m guessing around mid-June, that more positive signs will be seen and a clear “all-in” signal will be issued.

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