While the major indices closed around the flat line on Friday; the breadth was strong, and the rally off the Feb 5th lows continues. Indeed the Russell 2000 (RUT – 610.72) has rallied over 5% in the past six sessions and just like all the major indices, is running right into its respective down sloping 20 day moving average. If the rollover that began Jan 20th after the GOP Massachusetts senate victory is to find itself again, then this is the short set up point. Concerns still exist in regards to Greece, the Euro zone is slowing more than anticipated, China is trying to put the brakes on; there is enough ammunition for the bears to do something with, and yet stocks have been on a tear over the past week. We are very bullish longer term, perhaps not quite as much as Jim Paulsen of Wells Capital – who in this weeks’ Barrons is calling for a potential new secular bull market above 1565 on the S&P 500 (1075.51) to begin within in a couple of years – but we do believe that stocks are as undervalued as any time in recent history. However, to simply adopt a strategy that buys every pullback and then adds to it on further declines is not going to be a successful long term approach. There have to be times when irrespective of your long term viewpoint, you listen to the message of the tape. Recently, with the major indices closing below their 20 week moving averages, with the majority of stocks breaking below their 50 day moving averages, with the 20 moving averages on the major indices falling below their 50 day moving averages for the first time since the end of the world panic days; the message has decidedly been on the bearish side. While for now it may appear that not listening to that message would have been the more profitable approach, the verdict is still out. The major indices still remain vulnerable. Unlike the previous pullbacks since the rally began last March, this present correction has inflicted far more technical damage, and we don not see a quick fix. However, we will be watching the near term action very closely, and if we are able to close back above the 20 day averages and get a near term momentum buy signal, we will be forced back into a more bullish position. The action today will be quite pivotal, but for now at least, we will stick to our defensive stance.


S&P 500 (1075.51) the Holy Grail short set up comes into play at the down sloping 20 day average at 1090 today. There is plenty of resistance just above that level at 1100, and then the down sloping 50 day at 1108. From a technical perspective this is not the time to be adding long side exposure. We have to give the recent technical damage the benefit of the doubt, and just as pullbacks to up sloping 20 day averages are buys in Up trends, the reverse is true when the trend, as it is now, has turned Down. If early strength is sold, then look for support at 1076. Below that we have our 1059/1060 lows. Below that we are back on 200 day watch. For now, however, we suspect we could see an attack at 1090 and the action from that point will go a long way to determining near term action moving forward. If we were to see a reversal day, then the set up is there.

Nasdaq (2183.53) will meet its down sloping 20 day average at 2192. A close above that level would have bullish near term implications. That said we have the four tops at 2221/2228 from Jan 25th – 28th, which coincide with the 50 day at 2228. Certainly any move and close above 2228 is game set and match back to the bulls, but we are not out of danger and despite the strength of this rally over the past week, we are not convinced that the lows of Feb 5th will still not be violated.