Bulls Still Have the Benefit of the Doubt

The market wasn't able to generate much follow-through on Monday and Tuesday after last Friday's bounce, but the troops got back on their horse yesterday. It wasn't exactly a rip-roaring rally, but the indices were able to make a little technical progress. The Nasdaq pushed a good percentage point above its 50-day moving average. The S&P 500, while still under that key technical benchmark, pushed back over 1945, which has been a level that has acted as a minor lateral support/resistance level over the past several weeks.

It was a decent day for the bulls; but, while the indices aren't necessarily broken, they're still in a vulnerable spot. The question, then, is if the troops will be able to continue to make progress and put the action we saw the past couple of weeks behind us.

The bulls will argue that the recent dip was nothing more than a healthy market working off some excess. We got a little extended to the upside, and investors used headlines about geopolitical tensions to book some gains. Market players then stepped up at key support levels, and now it's just a matter of time before we're back at all-time highs.

Sure, the Fed has a lot to do with where this market is right now. But the economy finally has a pulse and that means the market won't need a lifeline from Nana Yellen and her crew of economic cookies-and-milk pushers.

The bears will counter that the underlying forces at work here are changing. Sure, issues like Argentinean debt, ISIS, Vlad "The Cad" Putin, and Hamas are important, but what's really got this market worried is the Fed. Their cheap money free-for-all is winding down, and that is causing a palpable change in this market's character. Just look at how stocks are acting under the surface.

The indices may be near highs, but gobs of charts are in shambles, leadership is narrow, the number of stocks hitting new highs continues to decline, traders are consistently selling anything that gaps higher, and a thorough review of the charts will reveal that the predominant technical pattern out there right now is the "bear flag."

As always, it's impossible to predict what is going to happen. To me, the cardinal sin of investing is thinking that you're smarter than the market. Once you think you know better than what the prices are actually doing, you're finished. As I mentioned last Friday, the long-term trend remains intact, and so far, key support levels have held. In my book, that means that the benefit of the doubt needs to go to the bulls. That will change sooner or later, which is why it's always important to draw your lines in the sand and be absolutely ruthless when it comes to managing your positions.

Early indications are for a slightly positive start to the day. We'll see if the troops can continue to make progress, but we have three Fridays before Labor Day, so I expect that the action will start to slow down even more. I also don't expect that the intraday action will get any easier to navigate, which means that it's a good idea to pick your spots carefully and avoid the temptation to force things.

-- Written by Jim Koford.

At the time of publication, Rev Shark had no positions in any of the securities mentioned.