Best To Sit and Watch

We saw an impressive display of market momentum last Tuesday as the DOW surged 136 points to break above the key 11,000- point resistance level. But, before you get too excited and jump into the market headfirst, you might want to take a few days and wait and see what the markets do. In other words, wait and see if the buying was driven by serious buying or was it due to a perception that some quick money could be made.

 Generally after a big surge in the market, there may be some exhaustion that follows. What you want to see is if the buying momentum can continue. You want to see if the buyers stick around or do they take profits as has been the case on previous breakouts at 11,000. In the previous breakouts, the DOW failed to hold and subsequently settled back.

 The price chart of the DOW is showing some topping action at 11,000. Given the size of the surge on Tuesday, it is questionable whether it is sustainable, but it is a good sign nonetheless. If the DOW fails to trend higher, we could see a move back to its current consolidation channel at between 10,700 and 11,000.

 As far as I’m concerned, the breakout on Tuesday was unexpected. Interest rates, earnings growth, and some signs of weakening in the market’s underlying technical strength remain a hindrance to the market’s ability to trend higher and finally hold at above 11,000. The mixed market breadth and some weakness in recent sentiment readings need to be seriously considered. The current trend is sideways and will remain that way unless we see a reversal on the charts that is supported by strong volume and improved technical strength.

 So, if you are itching to dive in, I advise you to sit back and see how things unfold over the next several days before re-visiting whether to enter. The reality is, I’m not sure if the market has enough gas to trend higher at this time.

 Sit tight and take some time and watch. I would rather be sure than to chase a market that could falter back.