Preparing for the 2nd Week of Trading in 2011

We entered the new year riding a relentless bull trend dating back to August 31st of last year. Since then, the S&P 500 is up 21%, the Dow up 16% and the NASDAQ up a magnificent 28%! In the run up since August 31st, there has only been one significant pullback, that coming shortly after Fed announced QE2 would inject $600 billion to purchase US treasuries. On November 9th, following new two year highs, the S&P pulled-back more than 50 points. The market chopped around for the remainder of November and has since seen a run-up of more than 100 points on the S&P 500.

So here we are trading at the highest levels since August, 2008 (before the financial meltdown). Although I am bullish overall as we begin the new year, I continue to support the view that the markets are presently forming a short-term top. The one thing that makes me skeptical that the top is already in, is that the consensus of traders seems to be waiting for this correction to begin. For this reason alone, I wouldn't be surprised to see one last run-up potentially to 1280 with a move to 1300 not out of the question. At the same time, the top may already be in at 1277.

Friday's decline, following the lower than expected gains in employment, saw a breach of the current up-trend channel dating back to the first week of December. Buyers did step in quickly to allow the markets to recover at least temporarily. It is however the first sign that the current up-trend could be in trouble. While the correction has not yet officially begun from a technical stand-point, I feel confident that it is coming. I will of course post it when I see it and I expect to see it officially begin this month.

Assuming that the temporary top is already in, my first target to the downside (ES) is 1236, 2nd target 1224, 3d target 1214 and the final and less-likely target is 1194.

That's my analysis heading into the next couple weeks of trading. As for my outlook for 2011, the bigger picture, I expect the bull market to continue. I expect price to hit the mid 1300s on the ES by mid 2011 and after that, there could be trouble. I'll comment as to why I see trouble looming in future posts. For now I won't look past the first half of 2011. In the short term I am cautious and ready for a small correction. Over the next 6 months, I am bullish...