Five Reasons To Be Cautious

First of all, I would like to apologize for my brief articles recently.  My schedule has been hectic and with little to say, I figured I was not going to try to BS the readers, you guys would smell it a mile away.  Thanks for being patient.

So on that note let's summarize not only where we stand presently in the market but also how we may be able to capitalize on it.  As you know the recent action has been sluggish at best.  Yesterday afternoon follow through was non-existent.  There is no reason to go on a quest for answers as to why the tape is acting so strangely, it only helps to know to stand aside until a clearer picture develops.  I believe that picture is beginning to come into view.

Nonetheless, we must not forget that we are in a unique environment presently.  Opinions are strong in both the bull and bear camps and right now it is a slugfest.  The buyers however, are very calculated, the moves higher intraday are far more orderly and painful, while the sell-offs are quick and decisive, exactly the action us HVT'ers desire.

So, naturally with price action to the downside being more conducive to HVT, I am rooting for the bears to take charge for a few days.  Based on my cursory glance at the charts, I may get my wish.

This chart puts everything in perspective, however, a solid case can be made by both bull and bear.  Last weeks close above 50-week moving average was the first in nearly three years.  It will be critical for it to follow up this week with a similar performance.  The bearish tone would be seen in the stochastics.  Presently they are reaching overbought.  Naturally, the stochastics only offer us a decision point, not an absolute signal.

Other measures of the market continue to send out a cautionary message:

1.  Chartcraft.com's Investor Intelligence survey showed bullish sentiment rising to 55.8% vs. 48.3% a week ago. Bearish sentiment fell to 24.4% from 29.2% the prior week. Meanwhile, bullish sentiment among the American Association of Individual Investors' survey of its members fell to 48.6% on May 1 from 63% on April 24.

2.  The VIX continues to languish near the lows for the year, although still just a bit shy of the lows touched back a few times in 2000-2002.

3.  The dollar continues to weaken, flirting with four year lows.

4.  The bond market has rebounded.  Not exactly a sign that the economy is improving and inflation will be rearing its ugly head.

5.  Based on the daily chart of the S&P 500 futures, I project May 10th to be a Fibonacci time date.  To review, it simply is an estimate of when, based on Fib extensions between 2 time points, a trend may reverse itself.  Given that the trend is clearly up right now, a reversal may be imminent.  This indicator has been quite reliable over the last several months at picking key turning points in each of the bear market rallies.  The March 21 call was the one that did not work.

But so what?  These indicators have been flashing red for weeks now.  Yep, and they probably will for a few more too.  My point is simple, I do not care, nor I am I trying to predict what will happen next, it makes no difference in my trading, since forecasting trends adds NOTHING to my edge as a trader.  However, I am waiting for some sort of "break" in order to fully capitalize on some dynamite trading opportunities.  The risk right now is to be long the market, if we do sell-off and gain some steam, you better damn well be ready to trade until your fingers are bleeding.  We are truly in a market where there are brief pockets of extreme opportunity.  Last July comes to mind.  In the meantime, keep your head down and be selective.  In fact, despite the relatively narrow range for the last 10 days, myself and several subscribers to my new Trading Room posted only 1 losing day.  We are focused and disciplined, exactly what the market demands right now.

My new trading service, "Dave Floyd's Trading Room," through which I offer live real-time audio commentary, analysis and alerts is now available. I encourage you to check it out. Click here for more information.

As always, feel free to send me your comments and questions.