SPY (@ 131.46) confirms rally to the upside (for now)

SPY (@ 131.46) confirms rally to the upside (for now)
20 Jan 2012 2:35 a.m. EST  I have been skeptical about this rally ever since the breakdown and attempted recovery from 115 in late November.   In my last entry, I wrote that the resolution of the high, tight flag to the upside or downside would be critical and since then it has rallied to the upside, indicating higher prices in the near to intermediate future:


At a personal level, I must make a mea culpa since I did something I generally advise others (and myself not to do):  ignore a simple system which on average beats the most sophisticated-sounding but complicated analysis.  
A buy signal was issued in late December on the 4th-to-last trading day of the year.  Yes, it was promptly followed by not just no follow-through, but a sell-off, so it seemed at first to fail, but then the market gapped higher, did not fill the gap and formed a high tight flag, then another.  These are very bullish.  I put less stock in moving averages than I once did (they badly lag market action but are helpful for confirming longer term trends) but the 50 day has crossed the 150 day which is another sign of a bull leg up.  The offsetting bearish signals (weak volume, short-term overextension, weak fundamentals, nearby resistance) all scared me away.  
So now the market is about 5% higher which may not sound like much but a mutual fund that beats another by 5% in a year is considered to be massively outperforming.   
Live and learn.  If you want perfection and regret not doing everything right, you simply cannot and should not be trading.   Last year was net profitable despite a very difficult market, so there is yin and yang and I must admit I sleep better in cash and short term bonds!
So what to do now?  It's late, but the signal probably should be taken here.  I will start moving into the market in pieces myself - a pull-back at some point would be normal, indeed, it's absence would be strange, but I remember the 2003 bottom which I completely wrote off only to see the market march higher.   The market is much smarter than any of us!  You don't have to guess its next move, simply follow its last which is on average roughly the same thing because of the wonderful power of momentum (and the fact that the market at some level is reflecting an underlying reality of a recovering economy, and the market tends to rally BEFORE that reality becomes apparent in the news).  
Again, a buy stop above the most recent highs will keep you out of the market if it suddenly swoons on bad news from Europe or some nasty international flare-up in the Persian Gulf, but will get you in at a higher price than a market order.  
Or just stop trying to be cute, dollar cost average your way in over the next few days or weeks as long as the current buy signal is in place (placing your sell stop at 120.00 moving it up as the 20-day low climbs with a mental sell stop in the middle of the range, at 125.43 or so).  
I will look at individual sectors next but for now missing this rally entirely may be the greater risk. 

SPY (@ 127.71 6 Jan 12) at a critical point

This remains a difficult, choppy market, but several bullish factors seem to indicate the next leg will be up:
    - the 20-day buy signal at about where the market closed on Friday (triggered the first trading day of the year when the market gapped higher at the open);
    - the fact that this signal was triggered on a gap;
    - modestly higher volume on up days than on down days;
    - a preponderance of up days to down days (12 of the last 16 trading days closed higher);
    - higher lows after the 105 bear trap in October (when the market gapped down at the open, made a new low below 107.5, then closed sharply higher for the day on strong volume - a key reversal day), then the 115 low around Thanksgiving and the most recent relative low at 120 around Christmas;
    - flags formed high and tight in the upper end of the trading range and now above it;
    - fundamental news is strong; the employment picture really seems to be turning around in the United States, whose economy is heavily dependent upon optimistic, employed workers (also known as customers).

As always some bearish factors give pause:
    - the market stalled exactly where the rally failed in late October, so strong resistance is in place; if this resistance is broken decisively to the upside, the next area of strong resistance is at 135 or so, the highs of July;
    - although up volume is higher than down volume, all volume since November has been below average; this could reflect normally light holiday volume, but it also means that moves made when most traders are away may have less meaning than moves made with solid market participation.

Next week will be a critical week as traders return to work, people have had more time to digest the jobs reports as well as trouble in Europe and tensions with Iran.   There are already signs that a weak Europe is more interested in predictable flow of oil and lower relative oil prices than in punishing Iran for developing its nuclear program.

Bottom line:  a cautious buy signal is in place after the 20-day high was hit.  Expect sharp pullbacks and equally dramatic rallies as the market equilibrates.  If you take the buy signal here and go long, the probability is high that the market will pull back, showing some red ink for a few days or weeks, so if you are highly regret averse, you can either:
    1.) put in a buy stop just above the most recent high (128.38); if the market moves higher, it won't do so without you but of course you will get filled at a higher price than a market order today; if the market sells off, you can move down the buy stop or withdraw it altogether;
    2.)  buy at the market but put in a tight sell stop just below the most recent flag (at 125 or so); this will limit your losses if the market sells off (unless it gaps across your stop) but has a much higher probability of locking in this small loss (so only use this option if you are comfortable with the idea of taking many small losses offset by a few large gains).