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Morning Cup of Jo: The Time is Now!

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Does the market have enough buying power, given the relatively low corporate borrowing rates to continue the M&A, stock buyback plans and LBO activity, and muster back through the recent break and continue this cyclical bull market?

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"Dear God, I pray for patience and I want it right now!"
(Oren Arnold)



Key Points:

  • Since my last commentary, the market has put in a small double bottom and re-tested the bottom side of the upward sloping intermediate trend broken on Feb. 27th.
  • Inflection points inherently are full of risk, both for the longs and the shorts.
  • If the markets breakout from these levels and complete the cup & handle formation this would be a confirmation that the market is not yet ready for a serious correction. Conversely, a break back down through the neckline of the double bottom on any kind of volume could signal a re-test of the March lows.


Market Commentary:

The time is now!

I ended the last 'Jo' penning the words "…caution and patience are warranted." Since then the market, beginning with the baffling comments of Fed Chairman Bernanke, has put in a small double bottom and has headed toward re-testing the bottom side of where the upward sloping intermediate trend was broke on Feb. 27th. Now is the matter of truth - does the market have enough buying power, given the relatively low corporate borrowing rates to continue the M&A, stock buyback plans and LBO activity, and muster back through the recent break and continue this cyclical bull market? Or, was Feb. 27th's action a shot across the bow and just the beginning of a larger consolidation that has not yet ended?

Last time I spoke about narrowing the Eye on the Ball ST support and resistance areas and mentioned that if broken the next level would stem from the prior levels listed in the Jo. I had no idea this would occur in a day. Since then the sisters have all come down on low volume and built a handle whose neckline was tested yesterday. However, there was no real power (volume) behind the rally that began the handle (Fed Day) and the action appeared to represent short term trading activity rather than anything more significant. Hence, I considered the volume and corresponding price action to be nothing more than short covering on the part of hedge funds and momentum traders.

Nonetheless, if the markets were to breakout from the cup & handle formation they are currently building at these levels, this, in my mind, would be a confirmation that the market is not yet ready for a serious correction. On the other hand, if yesterday's below average volume attempt was another ST top and the market busted back down through the neckline of the double bottom on any kind of volume I would definitely look for a re-test of the March lows.



Breaking those levels would bring me back to my original hypothesis that the massive volume global sell-off of Feb. 27th was just the beginning of something larger. Only time will tell and that time is NOW. As for today, I suggest allowing the market time to tip its hand. It is the most prudent bet at the current inflection point because there are extreme risks on both sides of the market (long and short). Again, patience is warranted.

If the market completes and surpasses the formation depicted above, the shorts will have to cover and that would likely drive the market even higher. If the opposite occurs, the long side buyers at the recent lows will have to sell. It is - in essence - the line in the sand between a continuation of bullishness or potentially the long-awaited 10% plus correction.

It may seem as though I am searching for a definite view of the current technical situation but that would be a misinterpretation. My belief is that the current cyclical bull market is going through a correction that will not be over until there is confirmation of further upside action of the broken trend and completed a consolidative pattern.

Stay tuned & good luck!

No positions in stocks mentioned.

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