Stock Buyers Returned
The market moved lower last week, and volume increased dramatically. Of course, the fears of a nuclear meltdown in Japan and the constant social tension in North Africa were mostly to blame. Everyday last week, it seemed as though the worst was yet to come in both regions.
Unfortunately, the weekend did not bring great news either. For lack of better words, we are at war with part of Libya. Japan’s reactors are being cooled, but smoke continues to rise from the plant. While both are possible improvements, neither situation seems particularly constructive.
While last week’s bearish headlines were able to drive SPX below both 1301 and 1280 support, the big (and must hold price for the bulls) 1250 support held sturdy. As seen in the weekend video HERE, the bears could not take out any of indices major levels of support last week.
And much like we have seen for the past eight months, the bulls quickly reversed the bear’s botched attempt to take the market lower. Going into this week, I have 1280 listed as mild resistance and 1301 as stronger near term resistance. If the bulls can take back 1301 this week, 1335 is the next and big target to watch. From there, a break above 1335 will lead to an extended rally to higher highs.
While I am on the bull’s side, I did not think last week’s bounce off 1250 looked like a sustainable bottom. I would prefer the SPX comes back down and tests that level again, and form a double bottom reversal. But if it takes 1301 back this week, the chances that last week was a bottom increase dramatically.
Despite my near term reservations, I maintain my outlook that higher highs will be made. And despite the string of losses over the past week, I think that favoring long positions as opposed to going short, is still the way to trade.
While the bad news last week was dreadful, investors did not panic. The market moved lower by an acceptable amount and quickly bounced off its low. Although certain stocks did experience large and fast declines, most of those companies also quickly rebounded in the following sessions. To me, that activity indicates consolidation, as opposed to a threatening bearish trend.
Psychologically, the market wants to go higher. Even during the first hours of Japan’s crisis, people were calling in asking, ”when should we buy Japanese stock.” In fact, Japan was the only global index to post a net positive inflow last week. The bullish trend over the past three years has programmed us to buy every dip. And until proven otherwise, that is what we will do.
