No Breakout On Great News – Bears Are Gaining Confidence As Profit Taking Sets In!

Last week, all eyes were on the Unemployment Report. It came out much better than expected and only 11,000 jobs were lost in November. Furthermore, 160,000 jobs were added to the September/October revisions. Many analysts had been revising their numbers higher and a great number was priced in. Once the results were released, the market shot higher. This is exactly the kind of news that could have sparked a sustained rally. After the first hour of trading, profit-taking set in and we did not breakout. Resistance is building and I believe the highs of the year are in. Thursday afternoon, very heavy selling materialized in the last 15 minutes of trading. The S&P futures dropped more than 10 points ahead of Friday's release. When I compared the trading volume in the S&P 500 futures, the selling pressure Thursday afternoon was much greater than the buying pressure Friday morning. Investors are anxious to take profits and they will sell into seasonal year end strength. In the last hour of trading on Friday, we did see a light volume rally. I attribute that to nervousness by shorts ahead of the weekend. Asian markets have been strong heading into a new week and we have seen a number of Monday morning rallies recently. We have also seen M&A activity increase and "Merger Monday" keeps sellers from aggressively shorting into the weekend. Now that we are in a new week, the selling pressure will ramp up. Bears gained confidence knowing that the demand for stocks was not strong enough to push us to new highs. Great news, seasonal strength and end-of-month buying could not overpower profit taking. In order for the market to move through this resistance level, the supply of stock will have to be absorbed by buyers. I don't see that happening in the last few weeks of trading in 2009. Asset Managers are not worried about missing the next big rally. They will buy dips, but they won't chase stocks. Some Asset Managers are taking profits. This is an extremely light news week. Earnings season has ended and the first meaningful release will not come until Thursday (initial jobless claims). This means that we will see choppy trading and I believe the downside will get tested. The dollar has started to rally and it is extremely oversold. This could ignite a short covering rally. A strong dollar would weigh on the market. I am not looking for a major decline heading into year end, but I feel the uptrend line could be tested (SPY 107). I have been selling out of the money call spreads and I am selectively buying puts. We have seen a number of reversals when the market tries to break out to new highs. These warning signs will be confirmed when we see late day selling. Watch the price action into the close. If you see selling – get short.

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