Testing Resistance

Lower oil prices and bounce in the dollar must have been what some were waiting for before endorsing the April rally.

While today was of absolutely no help to those overloaded in the market's most overbought stocks (basic materials, agricultural chemicals, mining, oil & gas, steel & iron, copper, farm equipment), it was an important and healthy thing to see unfold. If the market is going to sustain this rally, we need to see more profit-taking in overbought groups and for broad rotation to continue along with heavy institutional buying. That's how sustainable rallies last for longer than a few weeks as investors are dragged from the sidelines. Whether we will, however, still remains questionable.

Although I have no desire to be redundant, I know from the questions I receive daily, that I must be. Until they take out 1400 in the S&P and follow it up by breaking this downtrend at the 200 day, we must keep our emotions guarded.

In the short-term, I would also keep monitoring the XLF for a downtrend breakout. (As financials go - so does the market, remember?) What concerns me is that we'll probably see a breakout above the resistance levels in the financials, but much like we saw last October in the XLF, it tuned out to be a false move. It is for this reason, among many, why I want both the trend channel and the 200 day moving averages in the S&P 500 broken to confirm that this is not just a counter-trend rally. This rally is impressive and has been a good trading opportunity, but I think it is unwise to expect the bears to climb back in their dens without at least another swipe.

Clearly, earnings reactions have not been as bad as many expected and that has worked fairly well as a positive catalyst in a market that so disparately needs to think the worst is behind it. However, anyone who has taken the time to look beyond the headlines and listen to some of the conference calls knows that the economy is not humming along like the good old days. Don't get me wrong - the market and economy are not tied directly to the hip with each other, a point I've recently made in last week's mailbag, but it certainly helps both to be moving in the same direction. What we saw from today is that there are some real concerns over oil prices (and for good reason) and we need to see those pull back from a sentimental & market perception standpoint. I know I'm often asked how the market can climb with oil prices soaring, and that must be having an impact on the market at some level. Understanding board market psychology may be our best tell in this tape.

All in all, last week we saw hints that they were going to try to make a run at overhead resistance and sure enough that is what has unfolded. Now, the toughest and most important phase of this rally begins just in time for next week's Fed meeting.