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The Market Surges Higher But Remains Cautious

12/01/11 08:48:05 AM
by Billy Williams

The market got some good news that sent it higher. But is it enough to keep it going?

Security:   SPX, PNRA
Position:   Hold

Central banks worldwide stepped up to stave off the possibility of a future run on the banks by the public, announcing new measures to ensure short-term liquidity for Europe and banking as a whole. The bickering amid the European Union bureaucrats was predictable as was the squabbling amid the US politicians appointed to the "Super-Committee," whose members were supposed to discuss different ideas and proposals for balancing the nation's budget, but instead left both the market and the citizenry feeling anxious about the current state of things. This discord has given rise to an open debate whether it is safe to leave hard-earned savings in the very institutions in which public sentiment has soured.

FIGURE 1: SPX. The good news today by the Fed and European central banks caused the SPX to explode higher from a 0.618 Fibonacci retracement on strong volume. However, the market remains in a correction.
Graphic provided by:
This feeling of anxiety is stronger felt in parts of Europe where Europeans have real fear over the possible default of their sovereign debt while US financial institutions maintain a strong sense of watchfulness, fearing their own exposure to Europe's problems.

Yesterday, there was a brief respite as a plan emerged to keep credit available to Europe as well as liquidity in the short term, and the markets surged in response.

However, the market is still in a correction and has not worked itself out of it yet, and neither has a bull market been confirmed. There are stocks that have shown strength despite the strong distribution across all sectors, but this is not the time to begin buying stocks. See Figure 1.

FIGURE 2: PNRA. Panera Bread broke out higher from a tight trading range, but until the market signals a bottom, this is not a good time to buy. Once the market moves higher, though, PNRA may be a stock to revisit and consider taking a position in.
Graphic provided by:
Wednesday's price action when compared to the previous day's trading activity is an anomaly, where the day's price surge was a news-driven event rather than a price rise based on either future discounting of positive economic data or earnings surprises.

In addition, a bottom has not been formed; an O'Neil follow-through day will signal a bottom if price surges 1.5% or more on stronger volume. Statistically, this is a proven method that should reveal that the bulls have taken back control of the trend.

Since the market is in a correction, however, there are still stocks that should be recognized for their compelling fundamental and technical factors such as Panera Bakery (PNRA) (Figure 2). PNRA has reversed its downward slide in late October 2011 in a sharp price reversal, trading higher past its former all-time high and, as of late, broken higher out of the tight trading range of the past several weeks.

While it might not be the right time to buy into any stocks until the general market confirms a bottom and begins trading higher, stocks such as PNRA may be worth taking a position in once the larger market resumes an uptrend again.

Billy Williams

Billy Williams has been trading the markets for 27 years, specializing in momentum trading with stocks and options.

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