Bulls Fight Back!

FUNDAMENTAL ANALYSIS
The Bulls fought back today as the Dow gained a modest 45.68 points in a follow up to yesterday's small turn around. Even though the gain today was modest, it was certainly an extremely important follow up as it broke the pattern of 22 May that I mentioned yesterday. The gain today was due mainly to a surprisingly big surge in ex-auto durable goods order, suggesting higher production and sales in the near future and reinforced the economic recovery story. Crude oil rebounded today as we all expected and is now lingering at the $130 mark once again.

I received a note yesterday saying that if I am telling everyone to conserve energy instead of simply getting long on crude oil, then I must really be desperate. That cannot be further from the truth. First of all, I am an economist and I hope for a healthy world economy more than just filling my own pockets. Higher crude oil is just going to cause the world economy to go into a slump and even though I could make a buck just getting long on it, I want a healthy world more than just a healthy pocket. My other picks are making all the money I need for me and I don't want to be one of those that cause crude oil to go any higher. I hope I made that quite clear. Higher crude oil hurts the world and that result is what I hate. As an options trader, I really don't care where the market or crude oil go to because I have the ability to make money in every market condition, so don't think I am desperate for the market to go up... quite on the contrary, my pocket will also be VERY happy if the market went straight down. There is a difference between money making and social responsibility and both must co-exist.

Tomorrow's GDP number is going to be the focus of the day (see economic calendar). Skeptics are dying to see at least one quarter of negative GDP growth in order to confirm their recession talk while the bulls are expecting yet another positive quarter to disappoint the bears. Who will win? Nobody will know before the number is released but from the way the recent data have been coming in, the outcome could be more optimistic than pessimistic.

TECHNICAL ANALYSIS
So, what's the way ahead for the market? The Dow made quite an impressive turn around right at the bottom of its regression channel these 2 days on rising volume. This is certainly sign of strength and reinforced the 12500 support level. Are we out of the critical period yet? Not at all. We need one strong up day to reinforce the turn around, otherwise, the Dow could just as easily slip back down and break the support level. So, it is still not time yet to be overly confident.

Strike 1 To The Bulls...

FUNDAMENTAL ANALYSIS
Strike 1 to the bulls today. Stocks took a hit on disappointing durable goods order today. What was expected to be a positive number ended up as a negative number, driving futures down way before market opens. So, what is this Durable Goods Order number about? Durable Goods Order is a measure of future manufacturing activity and is a very important economic indicator that DO move markets. Unlike most other economic indicators which are basically lagging indicators of what has already happened, durable goods orders give an insight to future profitability of the manufacturing sector because the orders of today are the sales of months later! See how big this devil is now? What today's durable goods order number said was lower sales and possibly profits in the near future and that cannot be good for stocks. Adding fuel to fire today is the rebound in oil (the black gold) and gold (the yellow one). With possibly more rate cuts coming in the future, the dollar would continue to weaken and that always spell good news for commodities. But take heed commodity traders, nothing go straight up and forever. Remember the painful lessons in gold over the past few decades. For the bulls, all the reasons to be bullish that I have raised over the past few days remain intact... hang in there!

TECHNICAL ANALYSIS
Why does technical analysis work? Because many people, including institutions and their computer programs, think they work. To a certain degree, technical analysis is fast becoming a self fulfilling prophecy with so many investment banks now employing more quants and software engineers than portfolio managers. Ok, back to business. The Dow took a hit at the top of its linear regression channel today and that cannot be good news. In fact, there are a few very lousy places to take a hit and this is one of them. Taking a hit at this level reinforced and confirmed a short term downwards channel that sneered at my recent bullish view. However, a look at my P&F chart tells me that the market is riding on a strong rising trend line and that the support level for the Dow now is probably at the 11900 level with plenty of upside potential. With more upside potential than downside, it is still cleverer to buy the dips on this one.

So far, with the market going largely sideways, our covered calls and ride the flow strategy has been working with stellar results.


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