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Market Action Could Be Leaning Toward the Bears

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Yesterday's action was negative. Investors need to be a little more defensive right now and should be ready to act if weakness really starts to take hold.

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Yesterday was one of those days when the headline numbers in the major indices didn't do much to convey what happened between the bells. Three days of solid gains had left the indices extended to the upside and bumping up against lateral resistance levels, and while the troops did a good job of preventing any weakness from developing on Monday, a big gap to fresh two-year highs on news that the Bush-era tax cuts had been extended gave market players an excellent opportunity to start booking some gains.

The troops tried to move us off morning lows, but a sharp sell-off, which coincided with the release of the consumer credit data and news that the insider trading probe might be widening, ended up erasing all of the market's early gains. What was particularly notable was how quickly bids dried up in several of the small metal, oil, and other resource-related stocks that have been doing so well lately (such as L & L Energy (LLEN), Baker Hughes Incorporated (BHI), and FX Energy (FXEN) to name a few). What it boils down to, ultimately, is that we saw a technical reaction to some highly anticipated news.

The big question, of course, is: Now what? First of all, even though the Nasdaq and the S&P 500 were able to eke out slight gains on the day (the Russell 2000, meanwhile, posted a surprising 1% gain on the day), a reversal off fresh highs is definitely something to pay attention to. This market remains stretched to the upside, so I wouldn't be terribly surprised to see some further weakness in the near term, and I'd be hesitant to chase much to the upside. Up to this point, though, there's been little to indicate that we've seen an overall change in the market's character. Yesterday's action was negative, and we definitely need to be a little more defensive right now and be ready to act if we see some weakness really start to take hold.
However, the action that we saw toward the end of last week has likely created a supply of dip buyers who never had the chance to buy any dips as we rocketed out of that trading range we were stuck in for a couple of weeks. It's those sudden recoveries, just when it seemed like some real technical damage was imminent, that have made this market so difficult to deal with over the past 19 months or so and have allowed the dip buyers to enjoy such tremendous success. Plenty of hopeful bears are already eager to call a market top. As always, there's a smorgasbord of compelling reasons against this market acting well, but when the rubber meets the road, pricing action wins out over macroeconomic arguments every time.

At this point, I'm watching to see how those dip buyers act. There are a number of names on my radar that are setting up nicely, but scads of individual charts as well as the major indices could really use some consolidation if the troops want get into position to make a good run into the end of the year. Be picky when it comes to trades, watch out for signs that any strength is being sold, but don't be too quick to count out the dips buyers or discount the notion that money managers will be looking to pad their results into the end of the year.
No positions in stocks mentioned.
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