Friday's Strength Continues Into Monday As US Markets Look to Gap Up

US Futures gapping up this morning as buying continues following Friday's gains. Price of oil continues to pull-back despite no improvement in the Libya situation. Tension in the Middle East/North Africa (MENA) is only increasing as anti-government protests have now spread to Oman. Seems that fear over the price of oil has been contained on the reassurance by Saudi Arabia to replace any lost production. Can't ignore current strength as markets continue to rebound throughout the world.

Though it is easy to believe the markets are going to continue their customary path (of late) to make new highs, I am not yet convinced that is the case. We still need to see the ES break above the 1330-1331 resistance before knowing that the highs can even be re-tested, and even if that happens, I wouldn't be surprised to see some volatile action that moves price on the ES up and down through the 1300 to 1340 would-be range before breaking up to new highs or down to new lows.

I am tentatively bullish today, though I like shorts at 1329-1331 (ES).

Levels to watch today on the ES:
Resistance above at: 1326-1327, 1330-1331
Support below at: 1319-1320, 1312-1313, 1304-1305

Markets Continue Up Overnight After Yesterday Afternoon's Rally Off the Lows

Asian and European markets trading up, US trading higher as there are no new major developments in the Libya situation. The level of fear in the markets seems to have subsided, at least for the short-term.

US GDP numbers showed that the economy was not as strong as initially expected coming in at 2.7% versus 3.2-3.4% expectations. No major market reaction followed the numbers.

The S&P 500 is down more than 2.5% on the week. This is the largest weekly decline since August of last year, basically since before the current bullish up-trend began. We'll see where we close the week.

Its still too early to tell, but yesterday's lows could mark a potential end to the latest wave of selling. Technically, the current up-trend channel is still in-tact. It is important to see how the markets trade today. I am currently neutral, though I have a bullish bias intra-day. There is significant resistance above and the ES will need to trade through it before we can know if the current weakness has subsided. I wouldn't be surprised to see a move up towards 1320 today on the ES. I like shorts off that level for now and I currently like long entries around 1304.

Middle-East/North Africa continues to be a wild card. Breaking news from the region could influence a change in direction at any time.

Levels to watch today on the ES:
Resistance above at: 1312-1314, 1319-1320, 1323-1324
Support below at: 1304-1305, 1299-1301, 1293-1295, 1290, 1285-1286, 1277-1279

Markets Moving Back Up to Positive Territory After Showing Initial Weakness

European and Asian markets down again (though the Shanghai Index is up half a percent), US Futures were trading under 1300, but have seen a bid following jobless claims data. Jobless claims showed improvement, but were below expectations, so it is interesting that buying has come back in. Question is, can it continue?

The ES traded all the way down to the 1293 support during the GLOBEX session as oil futures were bid up to new highs overnight.

Levels to watch today on the ES:
Resistance above at: 1310-1312, 1317-1318, 1323-1324
Support below at: 1299-1301, 1293-1295, 1290, 1285-1286, 1277-1279

Additional Points of Interest:

1) I mentioned in a post last Wednesday that transcripts from the FOMC minutes acknowledged that some Fed members believed that QE2 may need to be tempered down. This sentiment was echoed in a quote yesterday by Federal Reserve Bank of Philadelphia President Charles Plosser:

He said, "Should economic prospects continue to strengthen, I would not rule out changing the policy stance to bring QE2 to an early close."

Quotes like that probably won't help to strengthen the markets in the short-term.

2) Amidst global unrest, dollar not performing like the safe haven currency it has been in the past, though money has flowed back into US Treasuries. Other safe havens seem to be the Yen, the Swiss Franc, silver and gold.

Potential Consolidation Day Following Sell-Off

Following the largest down day of the year, US markets are looking relatively stable so far. Asian and European markets mostly down overnight. Concerns over the situation in Libya remain, but more importantly, there is fear that contention and uprising will spread throughout the Middle-East/North Africa (MENA) as risk remains in countries like Bahrain, Jordan, Yemen, Algeria, Iran, and Morocco. The biggest fear is that unrest would spread to Saudi Arabia, the largest oil exporter in the world.

Not expecting too big of a range today as the market may consolidate following yesterday's big sell-off. I will consider this market weak unless the ES confirms a move back above the 1327-1328 resistance. I am a buyer in the low 1300s and a seller in the 1320s (ES).

Existing Home Sale data to be released at 10:00am EST.

Levels to watch today on the ES:
Resistance above at: 1319-1320, 1323-1324, 1327-1328, 1333-1334
Support below at: 1308-1310, 1302-1303, 1293-1295

Weakness... Do We Buy the Dip or Expect a Continuation Down?

Much to my chagrin, outside obligations prevented me from trading today, pretty ironic given that the markets saw the most action and volatility in some time. The one caveat though, is that my swing short position made up some ground in my absence and is finally looking to be in better shape. Markets will need to see some follow-through to the downside, however, for the short to continue to look good.

I mentioned last week that growing tensions in the Middle-East (including North Africa) would likely provide the catalyst for selling in the US markets, so it is not a big surprise to see weakness at the start of the trading week.

Will the weakness continue? That is the pressing question.

Political tensions and a near civil-war type atmosphere in Libya (the 11th largest oil exporter in the world at 1.7 million barrels a day) caused markets around the globe to sell-off on fears of higher oil prices and renewed concern over inflation. Saudi Arabia has tried to calm global fears by saying they will increase oil production in the short-term to compensate for any lost capacity out of Libya. Perhaps that will be enough to calm fears, we'll see how the situation continues to unfold. I don't think this is the end of it...

ANALYSIS OF TUESDAY'S ACTION ON THE ES:
The gap down was the largest since before the current bull rally began on September 1st of last year. Key support levels were broken as the ES traded through 1327-1328 and then through 1317-1318. To see this downturn continue, the prior 1327-1328 support needs to hold as resistance. The next key support level to test will be 1302-1303 ES. I expect to see a test of that level this week and consider the low 1300s to be a potential buying opportunity (I will consider taking half off my swing short position there).

Not Expecting Much Today

No major news this morning. Thursday saw very limited trading as volume was practically non-existent. Barring any unexpected news event that would catalyze more participation in the markets, I don't expect today to be any different.

Market continues to be overbought but could certainly float up further on light volume. I continue to view global unrest as the potential catalyst to put some volatility back in the market. When that happens, the likelihood for significant selling far outweighs the chance for the markets to trade considerably higher. Impossible to predict the exact timing so just have to trade what we see for now...

Levels to watch today on the ES:
Resistance above at: 1340, 1342
Support below at: 1334-1335, 1328-1329, 1322-1323, 1317-1318

Market Reluctant to Move Higher?

Asian Markets slightly higher, European markets are more or less at the flat-line and US Futures are currently showing some weakness.

Data this morning:
January CPI came in slightly higher than expectations, continuing and new jobless claims also slightly higher, but more or less in-line with expectations. Markets have seen some selling come in after the news. Market has been churning higher and higher, but there is a feeling of reluctance in regard to continued buying.

Interesting to see the Volatility Index (VIX) finish the day higher yesterday while the overall market also finished the day near its highs. This suggests the level of complacency in the market is going down despite continued bullish action. This can only be taken as a potential sign of weakness.

Tensions in the Middle East continue to be present and cannot be ignored. Although Iran aborted sending two warships to Syria via the Suez Canal yesterday, the chance of another tension-building event seems a likely scenario. Unrest continues in Yemen, Libya, Egypt, Syria, Saudi Arabia, Algeria and Bahrain to name a few countries.

As the market seems reluctant to move higher, the best odds for significant movement in the coming days would be to the downside. Lets see if minor weakness this morning continues...

Levels to watch on the ES:
Resistance above at: 1335-1336, 1338-1338.50
Support below at: 1326-1327, 1321-1322, 1315-1316, 1308-1310

Will the Fed Put a Damper on QE, Raise the Bank Lending Rate?

Interesting tidbit that came out of the FOMC minutes today was that

"some participants noted that if the very large size of the Federal Reserve's balance sheet led the public to doubt the Committee's ability to withdraw monetary accommodation when doing so becomes appropriate, the result could be upward pressure on inflation expectations and so on actual inflation. To mitigate such risks, it was noted that the Committee should continue its planning for the eventual exit from the current exceptionally accommodative stance of policy." - Briefing.com

Whether or not the Fed has any real intention of changing its monetary policy over time has yet to be seen and is certainly up for debate. The fact is though, that at some point in time they will have no choice. In any case, it will be interesting to see if this blurb gets any notice in terms of trading action over the coming days. It could be just the type of dissension that allows some selling to enter the market. Selling is a rare bird these days. The fact that some Fed participants acknowledge the need for a change in policy may be just the edge that some of the big money managers need to let go of some of their positions...

Just a thought...

See FOMC Minutes here.

Markets Seeing a Bid Overnight

On the heels of strong markets overseas, the S&P 500 is threatening to gap up above the prior consolidation highs of the past 2 days.

Economic Data:
PPI Data this morning came in as expected (rising 0.8%) with with the energy sector contributing to the bulk of the rise in producer prices. January Housing Starts beat expectations with 596,000 versus 540,000 consensus. January building permits were slightly lower than expectations coming in at 562,000 versus 575,000

Economic data has had little effect on the market so far. Industrial production numbers to be released at 9:15 EST

FOMC minutes due out at 2:00pm EST.

I maintain a slight bias to the up-side this morning, but we'll have to wait and see if buying can continue after the first hour of trading. May continue to be dull action today ahead of the FOMC minutes this afternoon...

Levels to watch on the ES:
Resistance above at: 1334-1335, 1338-1339
Support below at: 1327-1328, 1321-1323, 1315-1316

Market Showing Weakness After Weak Data

Asian and European markets mixed as China reports lower than expected CPI number. US Markets seeing a little selling following weaker than expected retail sales data.

Little has changed overall since yesterday, in terms of expectations, as we must wait to see if the 1330-1331 level can be broken on the ES. It is possible we see continued indecisive consolidation type trading similar to yesterday, though I expect we should see a larger range today than we did yesterday. Watch for the ES to continue down and test the lower 1320 support. Continued direction will be determined by whether or not the 1320 support breaks down or the 1330 resistance breaks up

Levels to watch on the ES:
Resistance above at: 1330-1331, 1333-1334, 1336-1337
Support below at: 1320-1322, 1315-1316, 1308-1310

This Morning

Asian markets up this morning, European markets mixed and US markets look to open flat.
Unless buying momentum takes out the 1330 level on the ES, I will prefer short entries this morning...

Levels to watch (ES):
Resistance above at: 1329-1331, 1334
Support below at: 1320-1322, 1315-1316, 1308-1310

RE: Potential Topping Point

On Friday I posted a short opportunity alert in response to potential topping action in the market. However, price action into Friday's close negated the alert. We had a short-term intra-day volume spike after breaking above the 1322 highs on the ES. Overall volume was relatively light on the day and the volume spike was typical of stops being taken out as the market made new highs. We saw modest selling follow the stops (7 points down ES), but prior resistance at 1320-1322 held as support and the markets rallied back up to make a new high to end the session.

So now I am neutral as I wait to see how the markets begin trading this week.

I will be watching to see if Friday's high (1328.75 ES) will hold as resistance. If so and ES closes the day back below 1320, that will be a nice sign of weakness and we can expect price action to continue down from there. The next level to watch would be the 1299-1301 support.

If Friday's high does not hold as resistance and buying continues, I will be tentatively biased to the long side, but cautious and weary of the always present potential of a sell-off. The longer the rally up, the harder the fall. For this reason you can't be blindly long at the current reaches of this bull market. You can't be blindly short in expectation of a correction either. The trend is still up and this can't be ignored. It is best to wait on the markets to confirm weakness before gaining confidence in the short-side.

With all the above said, warnings for a reversal continue to present themselves. If buying continues, I will be watching 1334 ES as the next potential spot to get short.

Potential Topping Point Today at 1327 ES

Too early to tell, we need to see how the day closes. But Shorts here at 1324-1325 make great entries with low risk. Could still be a final shake-out before the end of the day, but I am expecting a market reversal. If we close today above the current high, this viewpoint will be negated.

Market Indecisive Into the End of the Trading Week

I will be waiting to see if the market can find direction this morning. If ES can trade back above 1317, it will be an indication of a continuation of the moderate strength from yesterday. A retest of the highs above 1320 will represent the 6th such test in the past 5 days and could result in higher highs. At the same time there is a slight downward trend emerging over the past 3 days, so we'll see if we get another lower low today that would fill the gap from the close 1 week ago.

Levels to watch today on the ES:

Resistance above at: 1316-1317, 1320-1321
Support below at: 1308-1310, 1305-1306, 1299-1301, 1295-1296

Market Showing Weakness

Markets down in Europe and Asia this morning and U.S. market gapping down almost 10 points.

Jobless claims came in better than expected, but market failed to see much of a bid after the news. Will be important to see if buying can come back into the market today. I like selling the up-ticks today in anticipation of trading down to at least 1305-1306. I will be looking to buy the market in the lower 1300s and expect the 1299-1301 support to hold if the ES trades down there. Remember, be careful when buying a market that is selling off. Wait for support to confirm before trying to guess a bottom.

Levels to watch today on the ES:

Resistance above at: 1313-1314, 1320-1322
Support below at: 1310, 1305-1306, 1299-1301, 1295-1296

The Long and the Short of It

Since I have been short-biased for the past couple of weeks in anticipation that the market would reverse, I thought it important to express my current market sentiment.

Since rallying back from the sell-off on the 28th of January and breaking out of last week's consolidation above the 1306-1310 resistance (ES), long trades have taken back the reigns of being the trade of popular consent. I currently favor buying the dips now as well. That being said, when trading markets like the S&P 500, I have no interest in holding long positions for any extended period of time. In this type of over-bought yet still bullish market, I prefer to take profits sooner rather than later. I won't hesitate to take 5 and 10 point gains off the table. If ever I hold a long position over night (when I can't monitor the trade), I will use a trailing stop at the very least (One of the nice things about trading e-mini futures over the Spyders, is that you can hold positions overnight and still use stops).

Since I am in favor of buying the dips, have I shied away from shorts entries?

No.

There are plenty of opportunities to enter short. The key is that shorts should be intra-day trades right now, not swing trades (though, there is nothing wrong with holding a short that is already in the money with momentum to the downside). Based on current price action, it would be unwise to try and speculate where the highs will be put in ahead of a pending reversal. I had reasons for believing the short-term highs would be put in two weeks ago (S&P was approaching key resistance, cycles research indicated an inflection point was likely, we had turmoil in the Middle East, not to mention numerous technical signals suggesting a reversal). The markets did sell, but showed their resolve and rallied through that adversity. At this point, it is better to wait for the market to show and confirm weakness before considering short entries of the swing variety.

To re-establish my short bias, I will need to see one or more of the following (on the ES):
- Consecutive daily closes lower through prior support.
- A breakout to new highs that is quickly met and rejected by subsequent selling (this type of action will typically manifest itself in the form of a topping tail). Lower lows must follow.
- A daily close below 1306 followed by a failed move back up above 1310

Until then I am biased to the long side, but I recognize that a correction remains a possibility at any point in time. I remain leery...

Levels to Watch this Morning

Futures showing some weakness this morning following modest declines in Asia and European markets. Asian markets were open for first time since China announced a rate hike of another 1/4 percent. In reaction, the Heng Seng is down the most at over 1.3%. Its noteworthy to mention more political unrest between North and South Korea as military talks have apparently broken down between the two sides. No major economic news until Jobless claims tomorrow at 8:30am EST, though Ben Bernanke speaks at 10:00am EST this morning.

I'm more or less neutral this morning. I wouldn't be surprised to see some continued selling come in, though ES should find support above 1313.

Levels to watch today on the ES:

Resistance above at: 1320-1322, 1324-1325, 1328
Support below at: 1313-1314, 1305-1306, 1299-1301

Levels to Watch this Morning

Levels to watch today on the ES:

Resistance above at: 1317, 1320, 1325
Support below at: 1312-1313, 1305-1306, 1300-1301

Gapping Up Above Resistance

Friday saw the highest close on the S&P 500 Cash Index since 6/25/2008. This morning the markets appear to be following through on the bullish sentiment as each of the indexes are set to gap up. European markets also higher with the German DAX at new 3 year high.

So the tone this morning is definitely bullish ahead of the open. The key is to see if buying is sustained after the opening bell. Market is attempting to shrug off any notion that it is setting up for a reversal. I can't ignore price action and if this gap-up is followed by continued buying, I will have to remove my short bias (at least for the moment). We'll see how this morning trades and where the market closes before jumping to any conclusions, but at the moment, you can't ignore the strength.

To help the bears cause, the market will have to reject the new highs and trade back down below 1306 and back into the 1290s this morning...

Levels to watch today on the ES:
Resistance above at: 1313-1314, 1317-1318, 1321-1322
Support below at: 1305-1306, 1301, 1295-1296, 1288-1290, 1283-1284

Will Markets Break Out of Consolidation Pattern Today?

Market continues to consolidate above 1300 ES. There have been plenty of opportunities to trade the range doing some variation of selling above 1304 and buying below 1300. However, the market will eventually break upwards to new highs or break down. So if you're are considering shorting the high end of the range or buying the bottom of the range going forward, it is important to remember that the odds for success go down the longer the market consolidates.

Furthermore, we have Unemployment news this morning at 8:30EST which could be the catalyst for some movement. Watch for a false breakout to the upside. The 1310 level (ES) continues to be a bias-changer for me. As long as ES doesn't close above 1310, I continue my short bias.

Levels to watch today on the ES:
Resistance above at: 1305-1306, 1310, 1313
Support below at: 1301, 1295-1296, 1288-1290, 1283-1284, 1278-1279

Markets Slightly Weaker Ahead of the Open

Futures down slightly this morning, but ES has held mid-90s support thus far. European markets also modestly down. Market reaction to news this morning has been muted though jobless claims and non-farm payrolls came in slightly better than expected.

I will be looking to see minor weakness continue this morning with a move back down to 1295 and then 1290 on the ES. I like long entries from there today (intra-day). Of course price action rules here and I won't defend any long positions if price moves lower. I like short entries if the ES trades back up towards the highs. Though I am swing short the market, I will continue to trade intra-day according to short-term price action.

Levels to watch today on the ES:
Resistance above at: 1300-1301, 1305-1306, 1310
Support below at: 1295-1296, 1288-1290, 1283-1284, 1278-1279

Over-Bought Market Indecisive Just Below Key Level of Resistance

S&P 500 Futures traded in a 5.5 point range overnight to continue the narrow range based trading that has taken place since the ES broke above 1300 yesterday at noon EST. Market participants are uncertain and cautious as the S&P 500 sits just below key resistance after seeing months of continual gains. The DOW is actually trading above its similar key resistance point and the NASDAQ is only 100 points below its high from back in 2007. But the point is that investors and traders are exuding caution at this price level.

Think about this. Equities have seen a run-up spanning almost 6 months and almost 300 points (S&P) without a dip of more than 55 points in the process. Following this type of move the markets are running into the upper limit of key resistance for the first test of that resistance. Would you be willing to put your money on the line and buy here? Trust me the smart money is not buying here. I am not buying here and you are not buying here. Last Friday's sell-off confirmed to me that the topping process had officially begun. Up till Friday I was only speculating that a short-term top was forming. This is why I finally entered my swing short position as we retraced upwards. It was an aggressive entry, but I am only aggressive when I am confident.

In summary; I continue my short bias amidst bullish illusions.
With that said, I can't predict the market, I can only make educated decisions based on analysis and determine when to enter trades based on favorable odds. A close today above 1310 (ES) would surprise me and force me to reconsider my short bias... at least temporarily...

Market Rallies to New Highs... What Does This Mean Going Forward?

Turns out Friday's high didn't equal a top. It was an impressive two day rally to recoup all of Friday's decline and then some. I mentioned last week that there was a possibility of a break of the 1300 level (ES), so the fact that this happened now does not contradict the view-point that we are due for a correction. The current market behavior is still indicative of a top (or inflection point) and I continue to expect a move down to at least the 1250s on the ES.

However, given inflation concerns and the Federal Reserve's philosophy and willingness to print money to no end, we have to be weary that the market can continue higher. The gravity-defying price action that has propelled the markets upwards in the past 6 months is already a historical phenomenon. With that in mind, I'll tell you what factors will change my short bias;
It's simple, if the ES continues to rally higher tomorrow and closes the day above 1310, I will have to look at exiting any short positions. This just means that the correction will be delayed and I will be long biased until the market shows a new signal of a decline. In this case you just have to accept a loss (if you are short, like my current swing position). I will not recklessly hold onto a losing position. Can always enter that trade again.

This Morning

I continue to like short entries as the ES has crossed back above 1290 although I will be cautious amidst the current bullish market sentiment. Manufacturing PMI data across Europe shows growth and European markets are up. ISM Manufacturing data for the U.S. due out at 10:00am EST.

Levels to watch today on the ES:
Resistance above at 1293-1294, 1299-1300
Support Below at: 1283-1284, 1278-1279, 1272-1273

ES Retraces Almost 78.6% Back Up to the Highs From Friday

Short ES at 1289.75