What is the Market Telling Us? (by Leaf_West)

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I love the weekends as they give traders/investors time to do a lot of navel gazing and tea leaf reading.

Here is the chart I posted regarding my short term read of the SPY from last Wednesday:

 

SPY_April20, 2011_PreMkt02

Many people are talking at nauseam about a possible inverted H&S pattern …

SPY_April25, 2011_H&S

Now as a general rule, I think inverted H&S patterns should only be considered as a possible reversal pattern after a trend lower NOT AFTER A HUGE TREND MOVE TO NEW HIGHS.  To me triangles are continuation patterns (70% of ascending triangles break higher) and inverted H&S patterns are reversal patterns.  That is more of a note on semantics however …

If people are fixated on the H&S pattern I would warn them that widely focused on H&S patterns typically fail … be careful what you wish for!!!

Let's get back on track here … to make a long story short, I still think the price action is pointing us to a break higher.  There are plenty of reasons why price should NOT break-out and continue higher:

  • record high commodity prices
  • US housing sector doldrums
  • high US unemployment
  • US Gov't debt ceiling fight
  • possible end of QE2
  • Tightening Chinese monetary policy
  • Japanese earthquake/tsunami issues
  • "low" levels of market fear (see separate post on the VIX)
  • yadda, yadda, yadda …

I must point out that I am a big believer that the market is living on borrowed time, but I'm also a techincal-based trader.  As such I look at charts and charts to me look like we are going to break this triangle higher.

Bears are hot an horney here and point to last April when the market last put in a intermediate top and point out the "similarities" of the news back drop (see article comparing the two time periods).

I agree with the author of that article but I would like to point out one glaring point …

April 2010

SPY_April25, 2011_Daily_April2010

April 2011

SPY_April25, 2011_Daily_April2011

The biggest glaring difference to me is that the 2010 chart showed a market losing momentum and the 2011 chart shows a market regenerating momentum and looking to move higher.

It's as simple as that … don't over complicate things.  The market is poised to move higher and traders fighting what the market is "telling" us are foregoing potential short-term profits.

Market Leaders

So if the market is going to break this triangle higher and NOT FAIL, then the question is what sector/stocks are going to lead us higher?

It's all about relative performance … to avoid posting a ton of charts,  traders should be looking for new leaders if we do indeed break higher this week/next week.  I believe that the health care/consumer products sectors that have outperformed the market since the mid-February market top will give way to other sectors.

Some people think that financials have to lead any push higher … that maybe true and I think that financials will participate but relative weakness of that sector in April make me think that financials will be market performers at best.  I am on the look out for sectors/stocks that have been grinding sideways during the April/S&P Debt warning correction.

Without doing all of the reader's work for them I will give a couple of chart examples that I believe people should be seeking as trade vehicles for the potential move higher …

T_April25, 2011_Daily

Chemical stocks are one basic material sector that I am long and expecting big things from …

Chemical Index_April25, 2011_Daily

I'm long DOW …

DOW_April25, 2011_Daily

 

Here are a couple of industrials that looks good …

HON_April25, 2011_Daily

IR_April25, 2011_Daily

Technology stocks sold off more than the overall market but could provide us with a nice move higher …

IBM_April25, 2011_Daily

CY_April25, 2011_Daily

NTAP_April25, 2011_Daily

Consumer cyclicals offer some interesting charts …. WYNN shows that it wants to go higher and that makes me look at the current LVS chart with interest.  Is it breaking the down trend line?  If it is, will it play catch-up to WYNN?

WYNN_April25, 2011_Daily

LVS_April25, 2011_Daily

Other consumer cyclicals on my radar include COST and SBUX …

COST_April25, 2011_Daily

SBUX_April25, 2011_Daily

I have a ton of charts that I think will lead us higher …. watching charts like these will give you clues as to what the market is going to do before it does it.

Heads-up and good luck.

Cheers … Leaf_West