Bias Remains To The Upside

Pre-market futures are in the red with the S&P 500 pointing towards an opening loss  of 6.50 points.  Increasing concerns of events in Cypress and the EU over the banking crisis appear to be weighing more on global financial markets. 

We're all told not to worry because Cypress is too small to even matter.  And that's likely true, as long as you don't have deposits with any of their banks.  What started out as a 10% tax on deposits has morphed into a potential 40% tax. 

The S&P 500 has traded in a tight, sideways pattern for the last 8 trading sessions as it works off overbought conditions.  The index remains in a very bullish upward parallel channel, and numerous leading stocks continue to act constructively.

So for all the news from Europe out there, this market continues to move higher.  Ben Bernanke and the Fed continue to pump money into the financial system, and it has to find a home somewhere.  We've been told by the Fed that their current QE program is a total of $85B per month, with $40B of that going to support mortgages.

Mortgage expert Barry Habib was on CNBC on Monday and pointed out that the plan is actually quite a bit larger because the Fed is permitted to re-invest payoffs and pre-payments they receive.  So the actual Fed QE3 buying is closer to $120B per month. 

Here's a link to that short video:  http://stks.co/s6Tm 

Of some concern in the near term is the recent piling up of distribution days, coupled with lower volume on recent up days.  The key numbers of importance are straight forward: 1564.91 on the upside and 1538.57 on the the downside.

Here's a chart of the $SPX.   Click on chart to enlarge.

3 Dips & A Shakeout

As the market keeps chugging higher,  market participants continue to call (hope) for a "5-7% correction" that has not materialized.  That the market has stayed in a relatively tight, upward channel frustrates those who are under-invested, as well as those who sell out on the first day or two of weakness.

From the November 2012 lows, the largest correction in the S&P 500 has been 3.4% in late December when many traders were on vacation for the holidays.   Then we saw a brief 2.9% dip in late February.  But the market quickly reversed and headed back up.

There are any number of reasons why the market is higher.  The Fed pumping $85 Billion per month into the financial system certainly doesn't hurt.  But there's no denying that housing has strengthened, and the huge increase in energy production in the U.S. is another big reason.

Will we see another market crash when the Fed pulls back from their stimulus plan?  Maybe.  Possibly.  But why concern yourself with what could happen at some point in the future? 

That said, it's interesting to hear an increasing number of market pundits come on financial TV and tell us that "the market is cheap".   March is the 49th month of bull move off the March 2009 lows.  So keep that in mind for some perspective.

Getting back to the recent market, I've been looking closer at the price action inside the upward channel and found a repetitive pattern - "3 Dips & A Shakeout" - and you want to buy the shakeout.   

On both "shakeouts", RSI 14 held the low to mid 40s.  We're currently in the third phase of this pattern.  If it holds true, the recent 3 days of weakness marks the 2nd dip.

Click on chart to enlarge: