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Published Monday, Sep 06, 2010		Volume 41
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The first thing that stands out as we approach a new trading week is the lack of economic and earnings news that's due out. The only really significant piece of economic news will be initial claims, which is really on Thursday morning. The estimate is for 470,000 initial jobless claims, lower than what we've seen each of the past two weeks. The market would certainly like it if it turns out to be at that level or lower, but we're left to wonder how well the market will handle a number above that estimate, especially if we have another surprise at 500,000 or above. Heading into last week, the market was oversold and primed for a bounce regardless of news. As it turned out, most of the news was fairly positive, especially news relating to housing and manufacturing. The bulls took that news and ran with it, this time leaving the bears disappointed and frustrated. There are several sectors to watch closely this week, including both materials and consumer discretionary. Both of these charts have been annotated and included in the marketJOURNAL section where we've highlighted the key areas of resistance. If our aggressive sectors begin clearing critical price resistance levels, it will attract additional technical buying and make it that much easier for bulls to negotiate major resistance levels on our key indices. A very significant initial test will surface at the opening bell on Tuesday and it involves the small caps. The Russell 2000 led last week's advance and has now led the market on a relative basis for three straight weeks. This is important because small caps tend to lead the market higher during periods of economic improvement and recovery. So improving technical conditions on the Russell 2000 can foreshadow a larger scale advance in the broader market. Take a look at the Russell 2000 chart: Last week's advance, especially the large gains Wednesday through Friday, has left the Russell 2000 at a significant resistance level. The downtrend line is close to the 640 level and prior broken price support was in the 638-642 zone. Friday's close at 643 will put added pressure on the bears to defend their short-term turf. We say short-term, because the truly big resistance level on an intermediate-term basis resides at 675-677 or so. Until that level is breached, small caps are in an intermediate-term downtrend that must be respected, as are all of our major indices. Historically, the strength last week came during the one part of September where the bulls have generally done well. We mentioned last week that the early part of September has historical tailwinds and they most definitely helped to fuel a significant early September rally. In just the first three trading days in September, the Russell 2000 gained 6.86%, while the influential financial sector popped 7.16% higher. Is it the start of a more powerful uptrend or is it simply one more corrective-type rally during an otherwise down trending market? To be honest, it's too soon to tell. Don't forget, however, that September is the worst month of the year historically. And during the month of September, the second half tends to be much worse than the first half. If companies were too optimistic in their future guidance last quarter, we could begin to see warnings in the latter half of September. It's at least something to ponder. The performance of technology-related shares still has us concerned. This group should be performing much better than it is, especially if the market is anticipating improving market conditions over the next several months. Price/volume trends also have been disappointing since April, although we began to see improving trends last week. As market participants return to work in full force this week from August vacations, additional clues should surface relating to volume. Sentiment could begin to pose problems fairly shortly as well. The daily equity only put call ratio has been quite low lately. Only one reading in the last eight days has been above the average .67 level while five have been more than 10% below normal. Option contract volume has been light, so that tempers this bearish development to some degree. The most important thing to keep in mind as we enter a new trading week is this: We remain in the midst of an intermediate-term downtrend. While certain signs are suggesting the worst "could" be behind us, we must realize the further the current advance goes without eclipsing the major resistance levels (S&P 500 at 1131, NASDAQ at 2341 and Russell 2000 at 677), the higher the risk in terms of taking on new long positions. Downtrends usually consist of impulsive moves lower and this one has been no different. If you insist on remaining long, you might consider trimming your exposure at the first sign of a reversing candlestick. Caution is still advised. Happy trading!
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