Market showing weakness

The indexes opened lower and have since retreated further on reports the Fed is less likely to pump more money into the system via QE3.  This strengthened the dollar and sent the US markets down. But that is just what the financial press is reporting.  The news is random, but the market’s reaction to it is not.  So it is somewhat telling that the market declines when the Fed say the economy is strong enough not to need another dose of quantitative easing.  In many ways that is far more bullish than an economy that requires additional intervention.  But the side effect of a less accommodating policy by the Fed is a stronger dollar, which recently has been inversely correlated to the US markets.  Anyway, headlines are headlines and price action is price action.  We make or lose money based upon price action, so that is what we need to watch.

While we are lower, we are still well within the consolidation range of ~1385 to ~1420 going back to early March, so directionally today’s price action is inconclusive and we are still waiting for a definitive signal one way or the other.  On the lower side we have a potential region of support at 1387, 1378, and 1370 from the recent the Mar 23 low, Feb 29 high, and 50dma.  Chances are we will fall closer to that region before the buy-the-dip folks come back in to support the market.  Then the real challenge will be seeing who has a larger following, the sellers or the buy-the-dip crowd.

So far buying the dip has been the smart move and I have no doubt we’ll see traders try it again.  But every with sell-off bounce, the probability the next one will bounce declines, if for no other reason than we are one bounce closer to the one that doesn’t bounce.  But either way I expect the market will throw a head fake at us with a breakout above or below the range before switching directions.  If the path is lower, then Monday’s new high was the head fake.  But if the trend is higher, we’ll probably see a head fake lower before heading higher, most likely by dropping through the 50dma before bouncing.

And the longer we can stay in this sideways range, the more supportive and bullish it becomes.  With major news events around the corner with the employment numbers this Friday and earnings starting soon, there are catalysts for launching the next move.  At the moment it feels like the market is a little extended due to the long run and without any external inputs, we’d probably drift lower.  But there are still enough skeptics sitting out this bull rally and they could push prices dramatically higher if the economy produces shockingly good employment numbers or companies continue to post record earnings.

As for how to trade this, there is nothing wrong with locking in some of the great profits from the first quarter.  Remember, it is much better to be out of the market wishing you were in, than in the market wishing you were out.  But with a couple key catalysts on the horizon, we could see another strong move higher if investors are caught flat footed again and have to start chasing this quarter too.

Stay safe.