The Market Needs To Breakout This Week. If It Does Not – Resistance Will Strengthen!

November 10, 2009

Yesterday, the market staged the big rally we’ve been looking for. Once the move gained momentum, offers were lifted and we were off to the races. The market closed near its highs for the year and we are within striking distance.

There are many positive influences and they are overpowering future concerns. Earnings season is behind us and the results were very good. Almost 80% of the companies beat earnings estimates. The Fed is committed to keeping interest rates low. This week they will auction $100 billion worth of treasuries and to date, the demand has been good. Should this change, this will be the first warning shot. It will signal that interest rates are heading higher and investors are not so eager to finance our debt. Economic releases have been “less bad”. Most statistics plunged to multi-decade lows and it has been easy for them to show sequential improvement. This trend will slow down in the coming months, but for now expect gradual improvement to continue.

Mergers and acquisitions have returned and we have recently seen many deals. Pfizer/Schering-Plough, Berkshire Hathaway/Burlington Northern and Black & Decker/Stanley Tools are just a few examples. This shows that valuations are not overextended and that companies are willing to put cash to work. M&A also adds a bid to the market as traders try to identify the next takeover candidate.

The last two months of the year are seasonally bullish. Asset Managers don’t want to miss this move and they are putting money to work. Traders want to collect big bonus checks and Wall Street would love to see the market close right where it is.

Health care reform, tax hikes, a lingering war effort, budget deficits (state and federal), rising interest rates and high unemployment are issues that will weigh on the market in future months. For now, focus on the positives and stay long.

Do not try to short this market until major technical support has been breached. That will be your sign that the uptrend is over and a neutral (or bearish) bias can be justified. Bears have been carried out in body bags and picking tops (or bottoms) is a losing proposition.

If you have been following my suggestions, you have a nice portfolio of put credit spreads on right now. They should be safely out of the money and the positions will be easy to manage. If by chance you decided to buy calls, realize that you need to sell into strength. If the market can’t break through to a new high this week, take profits. If it is able to break through to a new high, place targets on your long call positions and let the market reach for your offers. It is important to “sell the rips”. A strong pattern is in place and you have to trade it as long as possible.

For today, expect a breather after a massive run up. We are near resistance and it will take a significant news item to break us out. A really great initial jobless claims number on Thursday would do it, but I doubt that we will see significant improvement in the number. The market should quiet down this afternoon. If by chance we see a decline of 10 S&P 500 points or more, it will fortify the resistance at the high of the year and greater caution will be warranted.
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