Bears Will Continue To Test Support – Buyers Will Wait For Signs!

This week is the calm before the storm. Earnings and economic releases are very light ahead of the holiday. The market has been able to look past a battery of bad economic news. It has rallied from deeply oversold conditions and the move has taken place on good volume and breadth. In the process, we broke through horizontal resistance at SPY 81 and the market briefly pulled back to test support at the 20-day moving average. This came early last week and in light of the dismal economic releases, bears had a perfect opportunity to push the market lower. The quick snap back rally tells me that buyers are anxious to buy on the dip. No one feels as though they will miss the next huge rally because our economic issues run deep. However, bulls will buy as stocks decline. The market briefly touched the 100-day moving average last week. It was helped by FASB mark to market rule changes. Now, the SEC is considering a reinstatement of the uptick rule and other short-selling circuit breakers. Investors are numb to government intervention. Every week we hear about a new plan that will save the day. We aren't sure if our current initiatives can be financed and our national debt has surpassed $11 trillion. Many analysts believe that our budget deficit will average over $1 trillion each of the next 10 years. If we are going to see a sustained rally, it must come from earnings. Bulls have argued that all of the economic releases are backward looking and that they don't reflect current conditions. Consequently, all eyes will be on the guidance corporations provide for Q2. Tonight, Alcoa kicks off the earnings season. Poor results are expected and the stock won't have much of a market impact. Next week, we will get critical earnings releases. The market has had a tendency to sell off ahead of earnings season because the first few weeks are dominated by financial stocks. Tuesday, we will hear from Goldman Sachs. It is the best run financial institution in the nation and they have typically surprised to the upside. Thursday, we will hear from J.P. Morgan. It is the strongest of the big banks and it should post decent numbers. Friday, we will hear from General Electric. Last week, they said that if economic conditions mirror the Fed's forecast for 2009, GE Capital will be profitable. These releases could all support a nice option expiration rally. Throughout the week, earnings from J&J, Intel, Charles Schwab, Baxter and Google will also play an important role. Overall, these companies are strong and I believe their numbers will be in line. There will also be a number of economic releases next week. They include PPI, CPI, retail sales, industrial production, the Beige Book, housing starts, initial jobless claims and the Philly Fed. Given the market's ability to shoulder bad economic news, I believe earnings releases will carry much more weight. If the bulls can reestablish a market bid this week, there is a chance for a nice rally next week. Option expiration buy programs could force short covering and we may get back above the 100-day moving average. After next week, I believe we could see a decline as more banks release earnings. The financial sector has rallied the last few weeks and there is room for disappointment. Many banks have stated that March was not as good as the first two months of the year. We still have many write downs to whether through as well. For today, prices could continue to drift lower. Yesterday was weak and global markets traded lower overnight. A handful of comments from analysts and money managers are weighing on the market. GM is also preparing for a possible bankruptcy filing. This “old news” is already price into the market and in the absence of other drivers; it has cast a dark cloud over the trading day. Ahead of the holiday, I expect the market to find support somewhere around the SPY 80 level. Once it does, we might see another round of buying heading into the weekend. A decent initial jobless claims number could start that in motion Thursday morning. The decliners led advancers by 3 to 1 and I do not suggest selling OTM put spreads until support has been established and the market posts a solid rally in to the close.

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