Taking a Timeout Good for Market

Seldom does the market come apart at the seams and turn into a bona fide bear market unless the financial stocks are participating/leading to the downside. That is why I would keep Goldman Sachs (GS - commentary - Cramer's Take), the 800-pound gorilla in the group, on your radar.

Despite recently announced record profits, Goldman Sachs got punished Tuesday. This is important because on Tuesday, the stock touched its 200-day moving average for the first time in a long time -- not since July 8, 2005.

Moreover, Goldman's latest profit report scored not just a record for the company, but also a record for the entire group. Goldman's net increase doubled to more than $2.3 billion for the second quarter. With the second quarter's earnings under its belt, first-half results make the firm the most profitable ever in the history of the industry.

But wait a minute, I thought earnings drove stock prices. I get it -- the stock had run up in anticipation of solid earnings and was sold on the good news. Not! Goldman Sachs topped on April 20, 2006, substantially before it tagged its 200-day moving average on Tuesday, June 13, 2006.

If there is one thing that you can pretty much say without equivocation on the Street is that it is the behavior of stocks on news and not the news itself that counts. Consequently, after tagging its 200-day moving average, Goldman should be a good barometer of the position of the market and the message of the market going forward.

The overhead 200-day moving average at approximately 1260 on the S&P 500 and the 1254 square, down 180 degrees from the May 5 high, contained the rally at the end of this week. This would be expected at least on the first push.

We go into the window of the climax/culmination cycle of 49 to 55 calendar days next week, and although Tuesday/Wednesday certainly looked to have the mark of a near-term washout, the rapidity of the bowling for strikes rally to 1260 squeezed a lot of shorts out, and squeezed them out quickly, which many times serves to weaken an already weak market. Quick, sharp rallies are the hallmark of retracements within a bear trend, while quick, sharp setbacks are the calling card of reactions in bull runs.

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Jeff Cooper is the creator of the Hit and Run Methodology and the author of the best-selling books Hit and Run Trading (The Short-Term Stock Traders' Bible), Hit and Run II (Capturing Explosive Short-Term Moves in Stocks), as well as a video course, Jeff Cooper on Dominating the Day Trading Market. He also created the Hit and Run Nightly Reports and co-founded a trading markets Internet site.

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