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Break Out Or Bull Trap?

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The ball is in my court!

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"The path of least resistance is what makes rivers run crooked."

(Elbert Hubbard)



Summary:

  • The market broke through two year intermediate term resistance at 1270 on the heels of the December Fed minutes.
  • Volume was decent but not spectacular.
  • While this is a positive technical development for the bulls, the "all clear" has yet to sound. We continue to look for a low volume retest of past resistance (now support) as evidence of a new bullish cycle.
  • In the meantime we will continue to follow the technical road signs and will remain patient in order to avoid a bullish trap.

Market Comment:

I trust everyone had a wonderful and well-deserved holiday season and New Year celebration. It's almost hard to believe it is 2006. It seems like only yesterday I began managing a long-only growth portfolio for managed accounts and now it has an official 5-year track record. It surely has been one heck of a ride. The S&P 500 (SPX) is just now returning to the level it was at back then - which brings us to our next subject.

Believe it or not, the trend I've been talking about for the last year has been broken. On Friday of last week the SPX legitimately closed above its intermediate term resistance trendline. January 2nd brought what I believe was the catalyst to this move - new Fed Chairman Helicopter Ben Bernanke and the December Fed minutes. Investors took these minutes as evidence the Fed will soon come to the end of this interest rate rising cycle.

When these minutes appeared at 2:00 PM on Tuesday, the first trading day of the year, the Dow was down almost 40 points. By the end of the day the Dow closed up over 150 points and brought a decent volume reversal day off of the respective 50-DMA's of all three sisters. The following two days were a fight with this seemingly everlasting trend resistance. On Friday it became much clearer and the trend was broken - finally!

Just to be clear, do not misinterpret my enthusiasm. This action does not imply that one should go out and jump right in with both feet. If this is a true change of trend, then there will be plenty of opportunities to invest in great companies breaking out of long consolidated bases. However - and you know me, there always has to be a however - if this is NOT a head-fake or what is called a bull trap, then the probabilities lie with a low volume retest in the near future of the same trendline which was just taken out. This would give us the technical confirmation to suggest the market has entered another bullish cycle.

Let's take a look:





We've been following this important two year intermediate term trend for quite some time and the breach certainly creates some excitement out of the gate in 2006 for the bulls. The bears meanwhile could be looking for a place to pull the rug out from under their bullish counterparts. Whatever the case, while this is certainly a notable development in the technical landscape, the all clear has hardly sounded. We will continue to follow the technical road signs for clues to the impending path of the market. A low volume re-test of past resistance (now support) would be the first clue. Stay tuned and remain patient.

Until next time:

KAT

No positions in stocks mentioned.

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