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  • Rev Shark:

    Rock, Hard Place: Waiting on Jobs, Digesting Fed
    2/3/05 8:35 AM ET

    "Success is the sum of small efforts, repeated day in and day out."

    -- Robert Collier

    After hitting a low a week and a half ago the market has slowly and steadily been working higher. The action has been positive and productive but not strong enough to inspire confidence that it can continue in the same manner for long.

    The first bounce, after a sharp pullback like we saw to start the year, has a tendency to lose steam as the folks who bought the bottom take profits, and those that were trapped in uncomfortable long positions use the strength to escape. Technicians generally do not trust V-shaped recoverys since there tends to be a large supply of folks waiting to sell.

    It is much easier to have confidence in an upside move after a bounce and a fade for a couple of reasons. First, the weak holders and the aggressive traders tend to sell into the first bounce. The folks who are happy to cut losses or take a quick trading profit will use strength like we've seen over the past week to reduce their exposure.

    The second reason that a bounce and a fade provide better support for a subsequent move up is that the fade helps increase the level of worry and concern. If the market begins to pull back, the overly optimistic bulls who anticipated that the market would recover in a straight line would become more worried and raise some cash. The increased caution helps build a wall of worry for the market to climb after it finds support.

    What makes things tricky is that a V-shaped bounce like we are experiencing now can last much longer than seems reasonable. We keep inching up and folks on the sidelines who missed the bottom become frustrated and start deploying capital so they aren't left out. The longer the market goes without a dip the more frustrated the folks with cash become and the longer the bounce can continue.

    A sustained V-shaped bounce usually will produce a day with above average volume when the folks waiting for a pullback give up hope for lower prices and become fearful that the market is running away without them. That behavior tends to have a domino effect and keeps the market moving steadily highly.

    We are at an interesting juncture today with the jobs report looming tomorrow and the FOMC interest rate decision out of the way. There are still some solid earnings reports from smaller companies but the disappointment from Amazon (AMZN:Nasdaq) and a weak finish from Google (GGOG:Nasdaq) yesterday are tempering the buying interest a bit. A slight crack in the market could easily grow on a day like this with no substantial catalysts but anticipation about the jobs report may help provide support.

    We have a mixed start this morning and not a lot of market-moving news. Nonetheless we should generate some clues about market character today that will prepare us for ways to play the jobs report tomorrow.

    Gary B. Smith:

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