Two Steps Forward, One Step Back?

Investors who are currently on the sidelines were hoping for a pullback. They got one yesterday. The selloff was a bit sloppy, as traders rushed to lock in their profits, using an overextended market and unexciting results from BAC. Add to that the expectations of the looming stress tests, the banks took it on chin yesterday, bringing down just about everything else. The breadth was pretty negative 28:3. Energy and energy related commodities, falling victim to a strong dollar, also caved in, exacerbating this free fall, as oil declined back into the $40's

The stage was set for more declines today, with a mixed bag of earnings from key companies like IBM, CAT, TXT, but after a gap down opening there was no continuation. The market rebounded nicely today, closing near the highs of the day, again with most of the upside and volume coming in the last hour. We may attribute it to Geithner's comments about the 'healthier', better capitalized banks, or comments from CAT management that said they may be near a through, or IBM that reported a pretty soft quarter, but reiterated the 2009 outlook.

But the same set of conditions just a few months ago, would have produced another 200-300 point pouncing. As I have been saying before, it all about market sentiment and it clearly feels like we are still happy buying the dips. I have posted before about several trillion dollars in cash or short term securities delivering near zero returns, and they are beginning to stir up some uneasy feeling among both retail as well as under invested professional portfolios. One can profess about a deteriorating economic conditions, unemployment, rising delinquencies, foreclosures...and on, and on, and on. I do not disagree, but I will caution one more time, to not confuse the NOW and LATER. Or to put it in a more familiar terms, recall the old adage - the trend is you friend.

Speaking of trends. Take a look at the SPY chart below. The long term trend, undoubtedly, is still very bearish, making the 'bear rally argument' highly plausible. The long term trend will remain in a bearish mode for some time, at least until we get above the 200 day moving average (about $97). The short term UPtrend was broken yesterday. The four week trading channel, was violated when SPY moved below 87. This is important, because this is the first break of this trendline since the March rally began. The test will come when SPY attempts to move back into this channel,closing above 87 again. If it succeeds, no real technical damage has been done and the intermediate trend would be deemed intact. On a flip side, it it fails to get above 87 and breaks below the next support at 80(defined by a straight trendline on the chart) it will be a lot more meaningful failure, and would likely foretell a move into the $74-$76 area.

So for now its two steps forward one step back. Let see how the rest of the week plays out.

SPY: