Market Needs To Rally Late. A Close Below SPY $143 Would Be A Warning Sign

The market bounced off of support last week and it staged a nice rally. Financials were strong and economic releases were good. It looked like we would challenge the highs. Unfortunately, the tone changed towards the end of the week. IBM's results were the first chink in the armor. It appears that the enterprise side of computing might also be weak (not just PC’s). Corporations are holding off on IT spending. Google accidentally released earnings during market hours on Thursday. The stock fell $60 and traders scrambled to adjust. The market hates chaos and the tech sector suffered. This selling pressure spilled over and stocks retreated on Friday. Once the downward momentum was established, Asset Managers pulled bids. Traders had to adjust (buy back short put positions) and that increased the selling pressure. Earnings guidance has been cautious and that is also weighing on the market. Caterpillar rebounded after posting this morning and it said that conditions in China are improving. We need to see cyclical stocks move higher this week. Apple will announce after the close Thursday and it has plenty of room to run now that it has pulled back. Earnings should be better than feared and nervousness should dissipate this week. Valuations are attractive and cost cutting has resulted in healthy profit margins. The elections in Spain were "market friendly". Many analysts believe that they will formally request aid now that the votes are in. Ireland is renegotiating the terms of its bailout and Greece will get its next payment. These are all bullish events. China will release its flash PMI on Wednesday and the results should be good. Industrial production, exports and retail sales were better than expected last week. GDP grew 7.4% last quarter. They are easing and increasing fiscal spending. Fears of a hard landing will subside. China's market has been up eight days in a row and it did not flinch during our decline on Friday. US economic releases have been good. We will get durable goods and initial claims on Thursday. These should not have a major impact on trading. Friday, we will get our first look at Q3 GDP. This number will be scrutinized. Given the releases the last few weeks, it should be decent. Now that European credit concerns and a hard landing in China are off the table, the focus has shifted to the fiscal cliff. President Obama said that he would veto any plan that did not increase taxes for the rich. Ultimatums like this are counter-productive. Both parties need to work together to reach an agreement. I did not feel the fiscal cliff would be an issue for a few more weeks, but inflammatory statements by either side could spark fear. As a bull, here is what I need to see today. We can test the downside early, but I don't want to see the low from two weeks ago fail intra-day (SPY $142.60). We need to close well above SPY $143. As the day unfolds, I want to see buyers. The market should grind higher into the close. This type of price action will tell me that buyers view Friday's selling as a one-day event. I also want to see that rally continue on Tuesday. This scenario will keep me in my positions. If the market can't rebound and I see selling late in the day, I will start to scale out of my bullish positions. I will exit half of my positions if we close below SPY $143. If the selling continues tomorrow morning, I will exit the rest. I don't mind taking losses at this level; but I don't want my positions to turn into a nightmare. Even if the market declines, I won't take bearish positions. Earnings have been decent and this quarter could represent a trough. Two major obstacles (European credit concerns and a hard landing in China) have been resolved. I still feel a year-end rally is in the cards and I will let this wave of selling run its course. Take your cue from the price action today. . .

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