The worst is behind us, right? right?!

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The market rallied off the March’08 bottom for nearly 10 weeks on the notion that the worst was behind us. The rally stalled for 2 weeks before showing signs of reversal in the last week or two. Both DOW and SP500 completed the 1-2-3 reversal last week, while NASDAQ and Russell2000’s break-out on last Thursday have all the looks of a head-fake following the huge sell-off on Friday.

On Weekly Charts: positive momentum all declining; both stochastic and RSI show initial signs of over-bought pullback; volume patterns bearish for the past several weeks with last week’s drop came in on the highest volume since the mid-March bottom; extremely bearish candle formation for both DOW and SP500; MA10 turning flat for both DOW and SP500 while still upwards for NASDAQ and Russell2000.

On Daily Charts: MACD crossed down and pointed down with negative momentum on the rise; DOW/SP500 in oversold; volume/candle patterns clearly bearish; NASDAQ/Russell2000 following the footsteps of DOW/SP500 with their latest failure of reclaiming MA200; DOW/SP500 solidly broke through MA50 while NASDAQ/Russell2000 still have some decent room; all major indices are now at major support levels.

Thoughts and observations about the current market conditions and near-term outlook:

1. Technically speaking, the market is at a precarious point: a further break-down of the market leaders NASDAQ/Russell2000 would confirm the trend reversal of DOW/SP500, and puts the testing of March bottom in play. The tenacious tech bulls are increasingly beleaguered, and their chance of lifting the rest of market is slipping.

2. Last Friday’s job report highlighted a new ominous trend: after weeks of overall benign/neutral headlines, the macro-economical conditions are going down a notch, which can be seen clearly in the banking/brokerage sector (breaking down to new lows) and housing sector (approaching previous bottom).

3. Oil price, shot up with the help of short-squeeze in the past two days, has the momentum to go higher in the near term. However, it is getting closer to the end of its parabolic movement. On this notion, I will start to actively seeking SW short setups in oil and all related sub-sectors.

4. The market reaction to AAPL’s new product release on Monday now becomes extremely important: a big sell-off could drive the tech bulls into the woods and a big run-up may re-ignite the tech bulls and save the market, well, for at least another day or two.

Overall Trading Strategy for Next Week

While some technical rebounding will occur next week, the market/economic conditions are increasingly unfavorable to SW longs. Personally, I am leaning to short-the-rebound approach, in addition to seeking initial SW short positions in oil and other commodity sectors. The key is that making sure you only long extremely oversold conditions (both daily and 60 min charts) and short the extremely overbought conditions, and ideally you have solid S/R in the vicinity as the stop references. As the battles between the bulls and bears in white-hot, be agile in locking-in profits.

Weekly Trading Calls

1. AAPL (for Monday):
SW-S1, IF it closes below 179/180 with a bearish candle/good volume, IDS around 182.5, IT=MA50;
DT-L1, if it spikes towards 170 following Job’s presentation, IDS just below 169, IT=175/176
SW-L1, IF it closes above 192 on a bullish candle and good vol, IDS just below 189.5, IT=200.

2. DRYS: DT-L1 if it spikes towards MA50/MA200, IDS just below 80, IT=88.

3. FSLR: CTT between 220/230 and 275/MA50. no mid-range trading.

4. GS: L3, ez=160-166, IDS just below 160, DT-IT around 170, SW-IT around 180.

5. SOHU: SW-S2, ez=88-90, IDS just above 92, CS just above 91 on bullish candle, IT=75/MA50.

Initial short setups in oil and related sectors:

CLR: extremely overbought on weekly/daily; huge run-up in recent weeks; speculative-S1 around 80, with a stop at 5% price move; IT=MA10

RIG: SW-S1 if it spikes towards 150/152, IDS just above 153, IT=MA200

APA: SW-S2, ez=139-145, IDS just above 150, CS above 142 on bullish candle, IT=120.

ENER: speculative S3 around 70, stop just above 75, IT=MA10.

Initial short setups in coal sector:

ACI: speculative S3, ez=80-85, stop just above 85, IT=65

JRCC: speculative S1, ez=42-50, stop just above 52, IT around 35

WLT: speculative S2, around 100, stop with a CS above 100 on bullish candle, IT=85/90.

I will also keep eyes on agriculture/fertilizers (AGU, CF, MOS, POT, MON) for possible initial short setups, but I will be more patient on this group.