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Minyanville's T3 Weekly Recap: Market Seems Healthy After 3-Day Bounce, but Banks Suggest Caution


A strong bounce from the banks starting on Tuesday provided a major boost to the market, and today they are giving back all of yesterday's gains.

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Markets sold off this morning despite the better than expected jobs number, which was not surprising given the potent rally we have seen since Tuesday's Technical Bullish Reversal. Futures initially jumped sharply after the announcement at 8:30am ET, but were unable to hold much of those gains, a sign that it would be hard to sustain upper levels today.

Short term active traders took most of their profits on any remaining long positions and looked for a quick cash-flow short off the open when we traded back through yesterday's high. Support held in the early afternoon, though, and it looked like we were headed to test the highs of the day, before a quick "rug pull" in the last half hour. We now have a new point of reference to trade against at 1150 in the S&P.

While complexion seems to be changing in favor of the bulls, there is glaring area of concern today: the banks. A strong bounce from the banks starting on Tuesday provided a major boost to the market, and today they are giving back all of yesterday's gains. I think it's fair to say that we are getting mixed signals at this point. Europe appears set to recapitalize the most troubled banks and backstop the sector, but today's action would seem to suggest some skepticism about that intervention.

On the weekly chart, the action was very constructive. For starters, the long lower wick highlights the presence of buyers at the right prices. Additionally, the candle was a Bullish Engulfing candle, one of the most reliable reversal patterns around. Lastly, the chart popped back above 200-week moving average support, and all of this happened on the biggest volume since the August closing low.

Typically what you want to see at some point in the next 4-7 trading days is a follow-through session to confirm the validity of this new fledgling rally. If this were to happen, we will probably be breaking the trend of "lower highs" that I spoke about in the Bloomberg segment this morning (embedded below).

Today's action amounts to nothing more than digestion, in my opinion, which is healthy. A small pullback will let some more guys into the rally so they don't feel like they are chasing excitement and extended stocks. No matter how much you like a stock or index, one of the central rules of my trading strategy is to never chase.

In fact, this week played out like a Trading Technicals 101 course. On Monday and overnight into Tuesday, we got acceleration to the downside out of the bear flag pattern. The gap down was a great opportunity for shorts to cover after a potent week-long down move. When the story came out about Europe's plan to recapitalize banks on Tuesday, we got an outside reversal on big volume, signaling that the short trade was off the table for the time being and you could test Tier 1 longs.

The bounce continued for the next two days, taking us into the 50-day moving average in the S&P ahead of a big economic data report. The report was better than expected, gapping the market up and giving traders a logical place to exit longs, before selling off the news and digesting a strong three-day rally. If the script continues according to plan, we may get some more choppy action next week before perhaps heading higher into year-end.

Happy Yom Kippur. If you're fasting, I hope it's an easy one.

Below is my segment from Bloomberg TV today.

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