Time For A Pullback?

SPX - Broken Upward Trendline

SPX - Broken Upward Trendline

Tuesday, March 20, 2012
Stock Market Commentary:

Finally, stocks and other risk assets fell as fear spread that China’s red-hot economy would begin to slow. As we have been mentioning for weeks, the market is extended to the upside and we would not be surprised to see a nice pullback to shake out the weak/late hands. From our point of view, the major averages confirmed their latest rally attempt on Tuesday 1.3.12 which was Day 9 of their current rally attempt. Since then, stocks have been enjoying a very strong uptrend. The benchmark S&P 500 paused near its 2011 high (~1370) before moving higher. At this point, it would be perfectly normal and healthy to see a 5-9% pullback at any point to give the bulls a chance to consolidate the recent gain. That would bring the S&P 500 down to 1320-1280. It is important to note that the bulls remain in control of this market as long as the benchmark S&P 500 stays above its 50 DMA line.

China’s Economy Cools, Housing Starts Mixed:

Before Tuesday’s open, futures were down sharply due to renewed fear that China’s red-hot economy may begin to slow. Economic data was light in the U.S. but the news that did come out was mixed. The Commerce Department said housing starts fell -1.1% in February to a seasonally adjusted annual rate of 698,000 units, but building permits vaulted to their highest level in more than 3 years! The Street was looking for housing starts to be little at a 700,000-unit annual rate.

Market Outlook- Confirmed Rally

Risk assets have begun pulling back which at this point is considered normal. The key going forward is to gauge the health of the pullback and see if the bulls are able to defend logical areas of support (recent chart lows and important moving averages). So far this action is considered healthy for the risk on trade. However, if sellers show up and support is breached then the bears will have regained control of this market (still a long ways off). As always, keep your losses small and never argue with the tape. If you are looking for specific help navigating this market, feel free to contact us for more information. That’s what we are here for!

 

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Written by

* Sarhan Capital, Founder & CEO (2004-Present) * Authors long/short weekly macro research note since 2004 * Completed Bill O’Neil’s CAN SLIM Master’s program in 2007 & developed the D.A.M.P. investment system in 2008