If The Market Does Not Close At A New High In The Next Few Days – Resistance Will Build.

After finding support last week, the market opened with a bang Monday morning. By the end of the day, prices had surged 26 S&P 500 points and we were within striking distance of a new relative high. Yesterday, a rally in overseas trading set the stage for a positive open. The market rallied to a new 2009 high on light volume. Within an hour, profit-taking set in and prices quickly reversed. By the close, the gains were marginal. This selling pressure indicates overhead resistance and we will not be able to break out without a catalyst. Initial jobless claims had the potential fill that role and drive the market higher. Last week, the number came in much better than expected and a second consecutive week of improvement might have sparked enthusiasm. This morning, initial jobless claims dropped to 502,000 from 514,000 the prior week. This was a good number, but it was not enough to push the market higher. Continuing claims dropped by 10,000 and that was also a little better than expected. Retailers have been releasing earnings and the guidance has been very guarded. Yesterday, Macy's declined after reporting earnings and this morning, Kohls is down after posting results. Wal-Mart is trading higher after releasing earnings, but they warned that they might miss Wall Street estimates this holiday season. This afternoon, the Treasury will auction off $16 billion in 30-year bonds. This is a fairly sizable auction for a longer-term maturity. Our government has financed its massive debt with short-term obligations. The appetite for long-term bonds at these depressed yields is light. If the auction goes poorly it could weigh on the market into the close. Next week, there will be many economic releases, but none are significant enough to generate more than a temporary move. Retail sales, Empire Manufacturing, PPI, industrial production, housing starts, CPI, initial claims, LEI and the Philly Fed will be released. Inflation has been benign and I expect that to be reflected in next week's releases. Housing starts could be a catalyst if it confirms the results posted by Toll Brothers yesterday. This homebuilder posted very solid earnings and it sparked optimism in the housing sector. Otherwise, I am expecting the trend of "less bad" economic releases to continue. The market has many positives to trade off of heading into year end. Earnings have been good, interest rates are low, economic conditions are gradually improving, merger and acquisition activity is increasing and we have seasonal strength. The "two steps forward, one step backwards" pattern has been very strong and you have to "buy the dips and sell the rips". The market feels a bit heavy and resistance is building at this level. If the market is not able to close at a new relative high in the next few days, we will see a pullback. That support level will establish another higher low and I expect to see buying around SPY 106. That could set us up for a rally that takes us to a new high for the year. I feel that we are in the eighth inning of this rally and caution is justified. The light volume during this week's rally tells me it was a lack of selling rather than intense buying. As long as the uptrend is intact, I will continue to sell out of the money put credit spreads on strong stocks. This strategy has served me well for many months and I currently have many positions that are safely out of harm's way. If the market breaks out in the next few days, trade the rally and take profits by selling into strength. If the market stalls, wait for a pullback and take long positions (or sell put credit spreads) once support has been established. The action will be light and somewhat choppy.

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