Morning Outlook (by Leaf_West)

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Squeeze … as I have mentioned in the past, squeezes are better if you can push the market lower first.  Was Friday's gap lower that move?  Was it big enough to really set-up a strong enough squeeze, or is this move going to fizzle out quickly?

Read on to see what I think …

SPY 135-Minute Charts

SPY_Jan 17, 2012_135min_02

As I have expressed many times in earlier blogs, a Squeeze would be stronger and probably longer lasting if it came/started from lower levels.

I have drawn the Fibonacci levels from the last major swing lows … a correction down to the SLOT area of any of these three ranges is only a potentially corrective move, and in each case the bullish scenario would still be valid.

Obviously, each set of grids has varying levels of importance … the first set is minor support, the second is intermediate support and the third is major support.

SPY_Jan 17, 2012_135min_01

Without a correction lower before we squeeze higher, traders can look to the current waves for projected targets.  I see a nice area of confluence right around the $130.50 – $131.00 area.  To me that is an area where I will be looking for a possible short.

I always like to look at my "Wave 2 Scenario" to see where we are …

SPY Daily Chart

SPY_Jan 17, 2012_daily_01

If May 2011 was the Wave 2 top, then we will see price fail in its bounce around the $130.81 area.  If price wants to make its Wave 2 top on this price push higher off of the Oct 2011 lows, then we could see price venture up to around the $138.17 level sometime soon.

Price can slightly exceed these levels and still be valid "Wave 2's" but generally, price should relatively quickly push back below these levels if/when price tests higher levels.

We SHALL SEE ….

More importantly, let's take a look at the Gap higher this morning …

SPY 3-Minute Chart

SPY_Jan 17, 2012_3min_01

Price could just gap and go this morning, but in most cases, traders are rewarded when they wait for the first pull-back before they chase this market for intra-day trades.

Using a standard Fibonacci grid based on the pre-market action, I illustrate the logical levels where price may find support.  The most interesting one is the 61.8% level which almost equals exactly the CBV from Jan 10th ($129.44).

NASDQ … Time to Show Us What's Up!

QQQ Weekly Chart

QQQ_Jan 16, 2012_weekly_01

I have talked in the past about the Diamond Pattern in the QQQ/NASDQ 100.  Add to the mix some yellow candles and the weekly chart is telling us to expect big things.  Weekly charts can take some time to resolve themselves, so traders need to sit tight and wait for the good news.

However, Diamond Patterns are not continuation patterns … we'll see what happens here soon I think.

QQQ Daily Chart

QQQ_Jan 16, 2012_daily_01

The levels shown here on the daily chart are the next levels of resistance for the QQQ's … Diamond Patterns typically see a failure of a break-out, so I plan on waiting on the test of the first break-out.

Sentiment Trader Notes …

Short-Term Bottom Line

While stocks saw their largest intraday dip in a month on Friday, buyers stepped in yet again.  Seasonality is negative for next week (and beyond for technology stocks), and sentiment is getting troublesome on a multi-week basis.  A close below 1280 on the S&P 500 would be a definite cause for concern because of it.

Intermediate-Term Bottom Line

The market is torn between good momentum and some questionable seasonality and indicator values.  The momentum rules for now, and until price shows some signs of cracking, the negative signs will just be a heads-up and not necessarily cause for action.  That may change as early as this week.

Indicator Score Gets Stretched

Last week, we've discussed a few of the indicators that have flipped into bearish territory for the market.  Nasdaq vs. NYSE volume, OEX vs. Equity option trading, and some others are suggesting downside for stocks.

These indicators have helped to push the Intermediate-term Indicator Score to its worst level since last December.  There are usually three different times we see an extreme like this:

 1.  During a vicious bear-market rally

2.  During the momentum stage of a bull market

3.  Everything else

When we get this kind of extreme under condition #1, the typical result is a nearly immediate correction.  Under condition #3, we see perhaps another 1-3 weeks of modest rallying before prices give back all those gains and more.

When it occurs during #2, there's really no telling how far the market will go.  The two most notable instances of this were in October 2006 and December 2010, when stocks continued to plow higher for a couple of months.

So where are we now?  Well, in Oct '06 and Dec '10, the S&P 500 was trading at multi-year highs in addition to showing signs of momentum.  Currently, we're not at new highs, but we have seen some signs of momentum, like the unfilled gaps.

Given the seasonality we're heading into, though, it seems unlikely that we'll have a complete failure to see a pullback or at least a consolidation.

Sentiment Trader_01

Most Sectors Weaken Around This Time

We've looked at seasonality, and know that it tends to be weak starting…well, now.  Starting around the 2nd week in January, stocks have had a consistent tendency to weaken.  Or at least not show much strength.  Especially technology.

I don't want to hammer on this too much.  Seasonality is a tertiary indicator at best, and can easily be overwhelmed by fundamental developments, technical breakouts and changes in sentiment.

Anyway, the table below shows the performance of various sectors since the day honoring Martin Luther King, Jr. became an exchange holiday in 1998.  The 2nd row, showing the performance of QQQ, is highlighted as it was the most extreme.  It was positive only 1 out of 11 years into the end of the month.

Sentiment Trader_02

I publish these Morning Outlooks everyday at my site … Cheers

Leaf_West  (http://blog.tradingwithleafwest.com/)

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