Another Surprise Before Earnings Season Begins

The market continued its sideways move yesterday and banged-up against 1335 resistance for most of the afternoon. Over the past three sessions the market has been stuck in a four point range and trading on miniscule volume.

 The minimal participation and movement is no surprise. Earnings season (officially began this week) will as far as the big money is concerned begin next week Monday with Alcoa AA. Shortly thereafter, we will also get earnings from large cap technology companies like IBM IBM, Apple AAPL and Microsoft MSFT, as well as the banksters like JPMorgan JPM and Goldman Sachs GS.

 These megacap companies will set the tone of the stock market for the next few months. Technology has led the corporate world out of the recession, and many are turning to the financial sector to add jobs and to keep the recovery in place. Guidance from technology behemoths will be heavily weighed by analysts - and the tech companies better start showing better revenue growth. From the banks, analysts will be monitoring write downs (should be write ups) as well as assessing the impact management believes the end of quantitative easing will have on the banks.

So if there was ever a time or an excuse for the market to blast in one direction or the other, next week caters to both. And so it's no surprise that a week before earnings season begins, SPX is testing previous highs. From a technical standpoint, a higher high should be viewed as a continuation of the bullish trend that started last year. And a new high could also be viewed as a bullish continuation from the larger bullish trend that began in March 2009, but I don't agree.

Here is a link to our long term chart of SPX.

 The orange line represented my target for SPX in the summer of 2010. 1350 was my target and the SPX reached 1344 before pulling back. As a rule of thumb (my thumb), on the long-term charts we give the indices 2% wiggle room, near resistance or support lines. For SPX that means a higher high can go to 1377 and, in my view, not be considered a breakout on a long term chart. Since we are assessing SPX break out on a long term basis, the index must overcome critical longterm resistance. But long-term resistance is not a number, it's a range, and in this example the range is roughly SPX 1324 through 1377.

 Now let's go back to comments I made throughout the month on how I think a move to new highs this week is bearish. A break out this week would push short term, higher high momentum traders, into the market – and squeeze the bears one last time. Casual money would also be lured into the market since they missed most of the run-up last year and have also been on the sidelines for the past five earnings season rallies.

 So now everyone with money is in the game, and they are all positioned in one direction, long. But our long term chart tells us that unless the bulls can take out 1377, there was no long term break out, and instead the SPX is up against mighty long term resistance. That is not to say the index cannot take its resistance out, but it will need validation from corporate earnings to do so. I am not bearish, or calling for a top, but do not expect me to give the bulls a pat on the back at a higher high today either. The market has been in a huge bullish phase despite shaky global economics for the past few years. And government stimulant programs are poised to end shortly. So I think a higher high (this week ahead of corporate earnings) needs to be viewed with a high degree of skepticism.

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 The TradeMaster Daily Stock Alerts watch list is bullish again - and this time it's on commodities and technology. To receive daily alerts each day before the market opens and for a full list of our trades and video of our current stock watch list CLICK.

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