The Market Will Reward the Patient

The market continues to meander nowhere.  It is stuck in a sloppy trading range and we are witnessing whipsaws almost every single day.  The light volume trading has kicked in and is making the market vulnerable to sharp swings in either direction.  I am still in the belief that the broad markets will work their way down to the lows of July before we see a more substantial rally.

For the short term, the Dow & S&P are setting up rising wedges from the lows put in from July. 

As you can see, a rising wedge formation on the Dow.  There is an outside chance that we tag the yellow line, however, I believe the lows will be challenged again in the coming weeks.

The S&P 500 is painting a similar picture.  I continue to hold to my 1180 to 1200 target for this move down.  1165 is even possible but we will evaluate once we get closer to that level.  We made a note on the chart that volume is currently very light.  Remember, many traders are on vacation making this environment very difficult to trade for day traders.  Once the big money comes back from the Hamptons, they will drive this market.  I am thinking down so that they can buy and then up STRONGLY.

Our next chart is of the $BKX, which is the banking index.  I want to point something out here which is find interesting.  This index has made a 61% retracement off of the May highs.  This is a good sign.  This is our first sign of strength and should put us on guard for a weak pullback so that we can go long this sector for a more sustainable rally.  We need to stay patient and the market will reward us.  I will do an extensive writeup on the banking index to give you some ideas of what looks good. 

Lastly, I want to show you a chart of Goldman & Sachs (GS).  It is interesting to note that this stock is trading near its lows from July.  There is a theory that when the market flushes out the leaders, a bottom is finally in.  Well, our leader may just get flushed out before this is all said and done.  Let's keep a close eye on this one.  I am thinking that we will see a large failure in FNM, FRE, MER, OR LEH before this is over.  I also suspect that the internal indictaors of health in this sector will be relatively stronger than the previous move down, setting up a bullish divergence which will be bought vigorously by the big players.