We have a very interesting week ahead for the market

Once again the indices were able to bounce off of the short term oversold conditions.  That generally means the market is still in good shape.  Technically the S&P 500 chart did not make a lower low which is also good.  Short term that could mean another push higher, perhaps to the upper end of the recent trading range.  Maybe higher.  It's starting to look similar to the 2004 Nov/Dec chop prior to the Christmas rally. 


                                  Charts provided courtesy of www.decisionpoint.com

I still believe that traders and investors remember the January 2005 sell off we saw after the extreme overbought readings in late December last year.  That could trigger earlier profit taking this year to avoid getting caught above the trap door we saw the first few days last January.

This is a tough situation for the traders out there.  Many of the shorter term indicators are looking much better after the recent two week sideways action we've had.  The Overbought/oversold indicator and the McClellan Oscillator are back into neutral territory.  The 10-day ARMS index has come way off its overbought reading (but not at a buy signal). 


                                Charts provided courtesy of www.decisionpoint.com


It is tempting to jump in for a play but of course there are several items on my list of "be carefuls."  For one thing this is the worst week of December historically.  Seasonality is a secondary indicator but always something to keep in the back of your mind.  Today (Monday) happens to be the 8th trading day of the month...


                             Chart provided courtesy of www.sentimentrader.com

Another warning sign is that commercial traders (usually considered smart money) have been increasing their short positions, at an average of about $6 billion per week since October.  This isn't out of the ordinary as commercials get progressively shorter as the market rallies, as they hedge underlying long positions.

 

It is when these positions reach an extreme that we should sit up and take notice, and we are near such a point now.  As of this past Tuesday, these traders were net short index futures by $27 billion.  This is the largest net short position since late last year.  We'd have to go back to the kickoff of the bear market in late 2000 and early 2001 to see other instances of such extreme shorts.

                
                            Chart provided courtesy of www.sentimentrader.com

So as I have been saying, this should be an interesting week.  We have the Fed meeting Tuesday and we are likely to see another rate hike.  I will proceed with caution again.  This has become rather boring but again I am waiting for a more clear cut long term buy signal before I get too aggressive.

The transfer into the bond fund last week turned out to be a worst case scenario.  After my transfer Thursday morning the big rally in bonds on Thursday afternoon brought on a pullback in bonds Friday, as I feared.  A .04 loss in the bond fund is about as bad as it gets.  My timing is unreal and it is partially attributed to the 12 noon deadline, and mostly to my greed of trying to anticipate a bond rally.  This is why I have been tentative to take chances lately.  I like getting that safe G fund gain until my indicators get bullish again. 

But that's the way it goes.  You take a chance, you can get hurt.  Bonds now have to move higher next week or the higher low will not hold  and I'll have to bail (see chart in lest weeks comments below).  Currently it is still OK.  We'll see if today, the day before the Fed meeting, spooks bond market again.

It should be an interesting week.  Let's watch and learn.

That's all for today.  Currently 100% F fund.  Thanks for reading.