The Consolidation Before the Storm

Pre-market futures are down a little this morning, but nothing fierce. Traders are focused on a "bad" warning from CVX, which predicted lower earnings. However, today is really the consolidation before the storm. Traders will posture, position, and throw a few elbows today, but the major whipsaws and market-roiling will probably hit about Wednesday and last for about a week and a half. That's when earnings season picks up some steam, and a bunch of economic reports hit at the same time.

There are a lot of tier 2 economic reports this week, along with several tier 1 level reports. All the tier 1 reports (PPI, CPI, and Retail Sales) are not as critical as usual because of where traders are focused economically. The tier 2 reports (Industrial Production/Capacitiy Utilization, Fed's Beige Book, Housing Starts/Building Permits, and Initial Jobless Claims) were market drivers last month (except for the Beige Book), and there will be residual emotion over those reports this week whether it's deserved or not. There are also two tier 3 level regional manufacturing reports this week (NY Empire, Philly Fed).

In addition to the heavy economic calendar, earnings season picks up momentum with GS before the open on Tuesday and INTC after the close on Tuesday. INTC usually reports after the close on Tuesday of the first heavy week of earnings season, and traditionally it's the report that really kicks off the volatility, but then again, these ain't traditional times.....Next week will be the first extremely heavy week of earnings this season. Just like last quarter, company reports are spread out more on the front end, which I don't like at all. I know why it's being done (to ease traders into earnings season in a historically bad bear market) but all it does is ramp up volatility early, and then prolong the "consensus" that the market has to come to before everyone can move on with their lives. I think it's a mistake, but then again, I hate manipulation with a passion.....

Be all the above as it may, the general idea today is a total lack of news followed by Niagra Falls, with the guy turning on the spigot for Niagra Falls banging and twisting the valve a little bit until he gets his arm loose enough to really let it fly. It means a lot of day to day market trading for the next two weeks. So as exciting as the news media might try to make today's trading for you, don't buy the marketing. The big backs and forths haven't even started yet.

The SPY (market) is set to open down around 84.90, near the gap from Friday, which is funny (or not) for traders who just had to buy hard into the close on Thursday because of all their freneticism over positioning for today.....I watch this stuff every day, and there are so many times I just shake my head and mutter over the complete lack of awareness on the part of so many fund managers that I wonder if people around me must think I'm either weird or I hear voices from outer space. I guess it's worth a good chuckle at the very least.

Here is a chart of the SPY just after the open:
(click on the image to enlarge)

It's just amazing to me to look at that chart because it doesn't even seem like I'm looking at the SPY. It looks like a Chinese internet stock or an Australian mining stock or some other gappy, weird looking foreign ADR type of stock. It's a bit unsettling that the market is doing this after all the volatility from last September - November. Price action should be settling down, not unsettling me with all its loose, gappy, goofy action, including this morning.

7:50 am MT: The 84.35 - 84.75 area on the SPY is a short term support. I expect the lower end of the zone, which is the top of the gap from Friday, to get tested fairly soon.

I also expect the same Googly-Eyes that just have to buy hard on the close on a Thursday before a three-day weekend during earnings warning season, just ahead of a heavy earnings and economic week, in the middle of a volatile trend during a bear market - because they were frantic about missing out on the big move just on the horizon.....I also expect those same Googly-Eyes to come in and ping the SPY off support a couple of times today as they position and elbow and scrape around for what they hope is another great dip-buying opportunity.

7:57 am MT: There's the next leg down as the SPY (market) heads right for the support area I mentioned above. Expect a ping or two, and some back and forth. I'm not all that hyper for puts, but if you caught some right out of the gate, then look to lock a few in around the 84.50 area. We will probably see a gap test back up around 85.00 on the SPY after the gap test down at the 84.35 - 84.50 area. Sheesh, so many gaps, I really must be looking at an ADR and not the SPY. I may start muttering to myself again.....

8:05 am MT: That didn't take long, from one gap to the next in a couple of minutes. I think we need some more gaps on the market.....

On thing about the next two weeks. There will be lots and lots of earnings momentum calls or puts, even as the market goes through its expected volatility. Don't get hung up trying to decipher the index charts too much, stand back and wait for a general consensus to appear in about two weeks. We may see some key signals before then, but whatever the volatility, there will be plenty of day to day trading opportunities, especially from earnings stocks and earnings sectors. So don't get twisted up trying to over-analyze the news, or the market whipsaws, just go in with precision and laser on some specific momo trades and then get out for another opportunity the next day.

8:21 am MT: The market looks like it will range back and forth today, so there may be some intra-day pushing and shoving, but the daily bar will probably be a consolidation candle, something like the consolidation before the storm. I going to work on the new service for awhile, but will report on the market from time to time later on.

11:55 am MT: The market was grinding back and forth in choppy intra-day action all the way up until about 30 minutes ago. Some fundies must be getting excited about all the good news they expect this week and are pushing the SPY to the highs of last Thursday.

Much of the bullish push today is happening over in banks, where the BKX is following through on the Ascending Triangle breakout of a mid to long term Reverse Head and Shoulders that I wrote about Thursday. Most of the other sectors, and all the major indeces are underperforming the banks.

Here is a chart of the BKX:
(click on image to enlarge)

The financial sector is huge enough that it's dragging the rest of the market into the green, and even some areas, like the SPY, to the highs of last week.