Last week's S&P 500 rally was strong in terms of price and breadth, but not volume. This remains the hallmark of all rallies off the Mach-09 lows. But our main focus is upon the developing bearish consolidation after the sharp April-to-July decline. This ongoing consolidation is now approaching major overhead resistance at the 140-day moving average, which has proven its merit as resistance to the previous two rallies. In each case, this has led to a decline into major support at 1000-to-1038 zone.

Hence, if one is bearish such as we are at this point – the risk-reward dynamic is favorable for selling short the market upon a move upwards of 1116. One's stop loss point would be a breakout above the previous recent high at 1132, at which point it would be rather clear a larger and more powerful will have begun.

 These are four of the biggest reasons why the market hasn't been able to sustain a move to the upside since April.  Until relative leadership returns (and stays for more than just a few days), the market is destined to waffle or head lower.

 

Semiconductors have been dreadful.  Talk about a lagging group since April!  The S&P 500 is 3% away from a significant breakout above its June high.  Semiconductors, on the other hand, are currently situated 15% below their June high!  That is NOT what uptrends are made of.  Semiconductors rallied this past week, outperforming the S&P 500 in the process.  That's a great start.  But before you get too excited, please realize that significant price resistance is dead ahead.  In fact, we've included the SOX as our Chart of the Day for Tuesday, September 7th. 
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to view the critical resistance levels the bulls must negotiate as we enter another trading week.

 

Financials are key to nearly every uptrend in the overall market.  In April, I discussed the lack of follow through within the financial space and that turned out to be a significant red flag as the market topped.  In early August, as the S&P 500 continued testing its 1131 price resistance, the Dow Jones US Financial Index failed to clear 271 resistance.  Once again, it proved to be a warning sign as the S&P 500 dropped nearly 10% over two weeks.  240-271 is a very significant trading range on financials.  Whichever way we break in financials is likely to have a major impact on overall market direction.

 

The Russell 2000 may hold the very first test for the bulls on Tuesday.  Check out this chart:

 

 The downtrend line off the April highs and the short-term price resistance both intersect almost exactly on Friday's close.  Early bullishness next week in small caps could bode well for the overall market.  Those who are in the intermediate-term bearish camp (including Invested Central) could consider trading the juiced ultrashort ETF (TWM), considering the strong reward to risk.  If the Russell 2000 moves much higher, you could exit with minimal loss.  However, if the Russell 2000 has found another intermediate-term high, a juiced short at this level would perform extremely well.

 

The selloff in bonds, and the resulting spike in bond yields, surely played a big part in equities rising last week.  In fact, the yield on the 10 year treasury hit MAJOR support in the prior week and was one of the reasons I felt we'd see a rally last week.  It didn't change the bigger picture, but definitely suggested the bulls had wrestled short-term control and could advance further in the near-term.  I alluded to that in my comments last Sunday evening. 
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for more details.

 

Below is the chart on the 10 year treasury yield and the key support level just tested:

 

 It appears as though the yield could rise to the 2.88% area to test broken support.  So long as the yield rises, equity prices should remain stable to higher.  If the yield begins falling again, all bets are off.

 

Happy trading!

Click this image for a live chart

Working from left to right, DIA recorded a new 52-week high with the move above 110 in April (1). Despite a new high, the ETF then declined and broke its February low in late June. This seemed bearish at the time, but the ETF quickly recovered and surged back above 100 to create a bear trap (2). A falling wedge took shape and the ETF broke above wedge resistance in July (3). The uptrend was in good shape until a sharp decline in August knocked the wind out of the bulls. DIA ultimately held above the June low and reversed course around 100 this week (4). In fact, I would now label key support at 99. Also notice that StochRSI bounced off the .50 level (5). Looking back, we can see that pullbacks reversed as StochRSI moved above .50 and held above .50 (green dotted lines). This gives us two levels to watch in the coming days and weeks. The bulls have the edge as long as DIA holds 99 and StochRSI holds .50. 

The Investment Company Institute (
ici.org
) compiles statistics on mutual funds and publishes them monthly. (

There is a one month delay between the end of the month being reported and publication.) Decision Point has been collecting these data for almost five years, and we finally have enough to start charting it.  Amounts shown on the charts are in billions.

The bottom panel on the first chart shows the percentage of of mutual fund assets held in cash. A low percentage of cash indicates that fund managers are bullish on stocks and do not believe they will need much cash to meet redemptions, as would be the case if stock prices were to fall. The current percentage (3.4%) is lower than what it was near the top of the last bull market. I would consider that to be bearish for stocks.

The next chart shows assets in money market funds. What stands out to me is that, while money market assets have declined since the 2009 market bottom, they have not dropped to the levels seen during the bull market in 2005 and 2006. I interpret this as evidence of investors' reluctance to make a robust commitment to stocks, in spite of a substantial advance from the bear market lows.

Bottom Line: We seem to be getting mixed signals from the mutual fund assets data. The low percentage of cash held by fund managers is bearish for stocks; whereas, the level of money market fund assets shows plenty of cash on the sidelines which could be used to feed a substantial advance in stocks. On the other hand, perhaps the relatively high money market levels indicate that investors have reached their maximum tolerance level for risk in stocks and that they will not be committing any more money to the stock market. I am not sure if this is the correct interpretation, but it would seem to be confirmed by the consistently low volume the market has experienced during the advance from the 2009 lows.

Engineers at Thomson restarted those feed machines and they appear to be working correctly now (2:45pm).  We are continuing to monitor things closely however to see if the problem returns.  We are not convinced that we are out of the woods yet.  The problem may return.

We will be working with Thomson (again, sigh) to try an understand why all four machines died at the same time – something that should not have happened.

Click this image for a live chart

The next chart shows Carnival Corp (CCL) with a bearish island reversal in early August. The stock gapped to 35, consolidated for six days and then gapped below 34.5. This created a small gap overlap without any trades. Buyers on the island were trapped with losses after this gap.

Click this image for a live chart

While overlapping gaps create the "ideal" island reversal, a little flexibility is sometimes required for identification. Sometimes the gaps do not create a clear space above or below the consolidation, but there is clearly some sort of reversal at work. The chart below shows Apple Computer (AAPL) with a gap down, consolidation and gap up. Technically, the gaps do not overlap because the consolidation high exceeded the low of the gap down. Nevertheless, there is clearly a reversal in the works with this week's gap.

Click this image for a live chart

Click this image for a live chart