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February 15, 2010

Wanted: Good News

Despite the five-day lag since my last post, there really isn't a whole lot to add to the outlook. The stock market acted more or less as expected late last week by breaking higher out of a pattern which twice before trained the masses to look lower. However, the charts still lack the sort of impulsive moves that typically leave intermediate bottoms in the dust. The dollar, gold, and stock cycles are all lined up for a move higher, so it certainly doesn't pay to count on any more downside here. But if we have printed an intermediate... and probably yearly... low in stocks, why is the bounce so weak?

My best explanation for the behavior is simply that we are still consolidating. Consolidation and correction are not the same, mind you. If my explanation is valid, the correction is over (meaning we've printed the low), but we will continue to consolidate (meaning shake out weak longs) by either testing the low or forming a triangle:

s&p 500 daily chart

Naturally, those of us long mining shares and their respective options would prefer a quick test of the low, the shorter route to glory. A triangle consolidation would eat up an entire daily cycle, implying a launch date two months out. Given the state of the dollar cycle, which is in a hot zone for its decline in a yearly low, I would give the triangle scenario minimal odds, but it's always worthwhile to keep an eye on possibilities.

I would also note that the story out of China may have put a damper on the action. The S&P 500 intraday views certainly looked bullish at Thursday's close. However, the index gapped 15 handles lower on the news of higher reserve requirements. But instead of collapsing, the market clawed its way back to nearly even. Such a recovery on bad news is a strong sign that stocks don't want to go lower. All we really need is a modicum of unexpectedly good news to play the role of catalyst.


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