Can the Bulls Pull Another Rabbit Out of the Hat?

By Jim Koford  MAR 28, 2011 9:50 AM

The bulls are doing all the right things if they want to pull off another one of their signature V-shaped recoveries.

 


Once again, traders are finding themselves in a very familiar spot. After months of trying to navigate a market that kept marching relentlessly higher, when even the most ardent of bulls were pleading for some sort of pullback into which they could deploy more capital, the market suddenly collapsed. Social unrest in the Middle East threatened oil supplies, a tragic natural disaster gave rise to a nuclear crisis, and worries about global demand intensified. If that weren’t enough, we've also had constant reminders about how terrible both the housing and jobs markets really are.

One day we were dealing with a market that seemed like it would never go down again, and the next, we had a market littered with broken charts. With signs of heavy distribution at highs, no one could say that the market gods didn’t give us at least a little bit of a heads-up. However, I don’t know if I'll ever get used to seeing months of hard won gains evaporate in just a matter of hours.

What’s even harder to get used to, however, is the sort of action that we’ve seen over the past week or so. They haven’t completed it yet, but the troops have been taking all the steps necessary to pull off another one of those all-too-familiar V-shaped recoveries that completely ignore logical resistance levels and seem to occur on extremely light volume.

What makes this sort of action so remarkable is that when the market breaks down like it did over the previous several weeks, there's a supply of trapped bulls looking to make more graceful exits and bears who are licking their chops in anticipation of some quick downside gains. Those trapped longs are prone to reduce exposure into strength, but that simply hasn’t happened in this market for quite some time now.

There are still plenty of overhead resistance levels yet to be dealt with, seven days of (nearly) straight up action has left the indices stretched to the upside, and a few groups (particularly financials and tech) remain in precarious shape. Nonetheless, the troops have fought back and are again in a position where they can pull another rabbit out of the hat.

It might not be logical, but if there’s one thing that everyone seems to agree on, it’s that the action hasn’t made a whole lot of sense for quite some time now. We’re at a point where it would seem that this market would need to take a rest as it digests recent gains before making a better push at the remaining resistance levels, but that’s been the case countless times over the past two years.

My plan, then, is to simply try to play what’s in front of me. That doesn’t mean, though, that I’ll be throwing caution to the wind. I became more defensive as the market broke down earlier this month, which means that I’ve been woefully under-invested during this bounce. As long as this market keeps holding up, however, I’ll continue to look for charts that are set up, but will be keeping my stops tight and making sure that I’m taking any gains I might have.





Lasting through April 15, 100% of the donations made to The Ruby Peck Foundation for Children's Education will be channeled to the children of Japan as they attempt to find their footing following this natural disaster; and to kick off this drive, we'll pledge $5000 to get it started. Please do what you can, as it will add up, and thanks.
No positions in stocks mentioned.

The information on this website solely reflects the analysis of or opin= ion about the performance of securities and financial markets by the writer= s whose articles appear on the site. The views expressed by the writers are= not necessarily the views of Minyanville Media, Inc. or members of its man= agement. Nothing contained on the website is intended to constitute a recom= mendation or advice addressed to an individual investor or category of inve= stors to purchase, sell or hold any security, or to take any action with re= spect to the prospective movement of the securities markets or to solicit t= he purchase or sale of any security. Any investment decisions must be made = by the reader either individually or in consultation with his or her invest= ment professional. Minyanville writers and staff may trade or hold position= s in securities that are discussed in articles appearing on the website. Wr= iters of articles are required to disclose whether they have a position in = any stock or fund discussed in an article, but are not permitted to disclos= e the size or direction of the position. Nothing on this website is intende= d to solicit business of any kind for a writer's business or fund. Miny= anville management and staff as well as contributing writers will not respo= nd to emails or other communications requesting investment advice.

Copyright 2011 Minyanville Media, Inc. All Rights Reserved.