The market will not go down. I have been doing very short term intra-day trades and they are too quick to plan and blog about so I have not been doing so. I really like to give readers a bigger picture thought process and some trade ideas that take a while to happen. Right now we are right around the highs of the year and in an overbought state. So for me to say we are going higher could be the day before a big correction and for me to say a pullback is coming is fighting the tape.

So what do we do. We wait. There is nothing wrong with being patient. Actually, in order to be a successful investor/trader you have to have patience. I hear a lot of traders talking about Citi, Bank of America, AIG, Freddie Mac, and Fannie Mae hitting new multi-month highs and wonder if they should get in. I would not unless I have a good risk/reward setup. Normally when stocks start sky-rocketing higher I sit back and root them on even though I have no position. Why? Because what goes up must come down. And the faster a stock goes up, it normally comes down with the same speed. So yes, I have been missing out on some explosive up moves, but as soon as I see the momentum dying down, I will be looking for great risk/reward setups to the downside.

For the past 3 days we have seen a lot of resistance around 1000/1007 level on the S&P. Is this the top before we pull back? I believe so. The talking heads believe that if there is a pullback then it will be shallow. Many believe 950 on the S&P or at most 870. I do not believe this is the case. I believe a downturn can really go a lot further and faster than previous pullbacks.

I reasoned this by looking at the psychology of the market right now. Everyone’s consensus is: no one believes this rally but are holding their nose and buying because we may have some type of recovery. Also, we have not had a 10% pullback since the March bottom so there is no real support under this market except the 870 level on the S&P. So this means, here at S&P 1000 if we get some substantial selling or a bad economic report, everyone with any type of profits will run for the exits. Many investors are still in pain from the Aug 07, Oct 08, and Mar 09 sell offs. So any familiar signs and investors will be determine not to get caught again.

The S&P rallied from mid-March straight up and hit a high in June, then traded sideways looking like it wanted to break down but then rallied to a new high mid-July…sounds familiar? Well this is exactly what happened in 2007 in the S&P. Once we broke to a new high in July sub-prime finally caught up and we gave back 4 months of gains in 1 month. This familiarity had me go back and read my trading journals from 2007. Here is an excert from July 12th, 2007:

“Record close as markets FLY!!! Dow up 290 points (+2.09%) Dow, S&P, & Nasdaq are at record closes. Best percentage gain of the year. Retail sales and M&A spark the market rally….seems to have a short squeeze towards midday as markets surge faster. New money came into the market while investors had conviction. People don’t want cash positions as dollar weakens.”

Doesn’t that sound like July 23rd, 2009? Those who don’t know their history are doomed to repeat it. As the markets convincingly hit new highs on Thursday and Friday, I could not help the fact that we are still in a bear market. Yes, price pays, but there is no way I can go against my gut. I have been churning through charts trying to figure out why I can’t go with the rally. I started to ask myself what would really put me in the bull camp? I think it will have to be a fall/winter rally and not a summer one. Historically, August, September, and October are tough for the markets. So for the next 3 months, even if we do get that 25% upside to 1200, I will be playing it in chunks and not with true conviction. However, if we see a substantial break to the downside, I will trade it boldly.

Right now, I’m looking at Apple (Nasdaq: AAPL) beat earnings as the stock goes higher in after hours. Today we broke to a new intra-day high along with a new closing high. After this huge run up, I am looking at this week’s close to see where we are headed next. A decisive break above 956 on the S&P and we could easily get to 1006 and after that there is really no potential resistance. So what does this mean:

If we break above 956 on the weekly level, this is also a break above the 50 MA on the weekly charts. This is a level viewed heavily by big mutual fund and institutional buyers. If we convincingly break above this level I will be looking to go long at any opportunity. We could really see another 25% to the upside (yes 25%!) if managers really start to put some money to work!

On the other hand, if we decide to break down, then we will have to measure the size of the pullback, because right now everyone is looking to get long and for some reason every earnings report is being view positively. So if we do get some selling pressure I think it can be a real chop to the downside until the August jobs number comes out (August 7th). If this number is view negatively, it can really start a pronounce move to the downside. However, if we get something that beats expectations then the market may start it’s upward stampede. An early tell signal will be the jobless claims numbers that comes out every Thursday morning. These numbers will also be used as catalyst in either direction.

So in the end, the next move could lead to a 20-25% in either direction so I will be patience until the market shows it’s hand.

Monday I talked about how the markets wanted to move up and that’s where we should go. Why didn’t I stick with my guns? The indicators indicated more upside but I didn’t listen. We failed to move up significantly after the Goldman Sachs earnings release and instead of seeing yesterday as a consolidation of gains I saw it as bulls becoming too tired. Then the unexpected upside reaction to Intel earnings I figured was a gap into resistance where bears would regain control. My revaluation was definitely wrong. The markets shot out the gates and took no prisoners. We broke through the 20 MA, 50 MA, and a potential 930 resistance level on the S&P 500. Also Morgan Stanley and Bank of America are continuing to the upside to their $30 and $14 respective targets that I outlined on Monday.

So what now. I have no clue. Right now I am going to step back from predicting market behavior until next week. The next couple days is anyone guess as we have shot up significantly in the past 3 days and we are about to see some real key earnings Thursday and Friday. I also said the banks have a nice chance to run higher and this still may be the case. So if you can’t stand the heat, get out the frying pan.

Trade Reviews
My last idea to short anything that moves obviously was wrong. So right now we wait for constructive set ups.

I know yesterday I said the market seemed like it wants to go up, well it did. Now given the after hours moves from a positive Intel earnings, I think it’s now time to head lower. The hourly charts are overbought and ready to turn and tomorrow mornings gap up will set up perfectly to enter shorts.

Trade Idea
Short anything that moves! I will be looking at big cap technology names, specifically Apple (Nasdaq: AAPL).

Trade Review
Morgan Stanley (NYSE: MS) opened up and I got the morning shake out but I still got in too early. Because of this I was left in the stock all day in a sideways trading market. I finally got out in the afternoon for a tiny loss.