Today is Thursday June 4th and the market pulled up off of yesterday’s low.

As I mentioned yesterday that the market was in a pretty good position to follow through with some upside early momentum at the open. Well, the momentum just carried on through to the rest of the day as well. The Dow was up 74 points and the S&P about 10, roughly 1% on each. Nothing really more to say about market direction than I have already said, so I will just keep it moving.

In today’s trading, I did pretty good at a little over double daily goal. Started out up and stayed that way until I was done. Traded for around 90 minutes today and moved on. I did notice later in the day that the markets just did not want to go down. I consolidated for quite a while there at the top today.

When I see a market do that for a long time, we usually see a pretty big move coming soon after. All of the consolidation has stops on both sides of the fence and since the move has been to the upside, there may be a lot of stops under today’s lows and all along the way. Tomorrow is going to tell us a lot. Where we close on tomorrow’s session may give us insight into the next 2 or 3 days of action. There is room to sell off for a day or two and still remain intact. Let’s just watch it and it will tell us what we need to know.

I hope everyone liked the little lesson on how to draw parallel lines, when you don’t have all the information. It can help give insight into what may come next. That is part of the battle. If you can extract information from price action you tend to be more in control of your environment. That atmosphere can only give you more confidence when mapping out your strategy and getting what you came for.

Yesterday I had a quick mention about people in the know, having insight into market direction and thought I could say a little more about how some of that could happen. Markets are driven my money, I think we all know that. But there are factors that much of the general public are not really aware of and one of those things is the “money supply”.

The available money in the system at any given point in time has a lot to do with market direction. As the federal reserve expands the money supply this makes credit more available. With more credit available, the markets have always been a benefactor in this environment. In contrast, when the money supply is being pulled in the opposite direction, money for loans through the banking system is not as available and requirements tend to get tighter. This restricts the money supply.

The stock market direction is very tied to these conditions and one in the know can draw some very interesting conclusions. The money supply was always published as M1 M2 and M3. They do not report on, or make public, all of these measurements of money as they always did in the past. The change came a couple of years ago. Since then there is only small amounts of information available to the public, not enough to come to the same conclusions as one would be able to do in the past.

One other measurement of available money is mutual fund reserves. This has always been tracked and closely monitored. When you reach a certain percentage of cash on hand, often this, as well as other factors, when combined can spark rallies that have sustained buying power. Again the same is true, if mutual fund reserves are very low, that can mean there is not much fuel to toss in the fire and things often pull back. Consumer sentiment has a lot to do with this as well, because when people are feeling good, they like to invest. The opposite is true, as things turn negative, investors tend to pull in their horns and raise cash.

All of this is usually done at all the wrong times. When it’s going well is usually at the top, so Joe investor comes in and adds to his holdings, only to soon see it evaporate before his eyes. When there is blood in the streets, as it has been called, everyone is getting out because they can’t stand the heat any longer, right at the bottom. Go figure!

For some reason, that is how it too often gets played out. People are usually followers and get sucked in by the herd mentality. That should be a parallel for sheep, not people. We know what happens to them after that. Slaughtered.

One more point to help bring that out. You can watch the headlines or major news magazines, like Time,  Newsweek and others. So too often, those headlines about the market usually work in the exact opposite. They might imply by the article that the market should be continuing up from there. That is a sure sign that it is about to drop. The same is true at the bottom of markets, feeling hopeless, a turn around is at the door. It’s funny how that is, but it is, I have seen it dozens of times over the years.

Here are some contrary sentiment numbers over the last 4 weeks. Bearish newsletter writers have become less bearish over the last 4 weeks in a row, not good for the bulls. Less and less of them are bearish on the market, 34, 29, 28 and now this week 25.  A number of 20% signals an almost sure move down, or until the numbers change and that usually only happens when a sell off is under way.

The funny thing here is the bullish side has not really moved and is at 41, 41, 41, and 42.5. A move of 35% or less usually brings in a turn around. Before the rally started, we were about 26%, one of the lowest readings I can remember since following this over 20 years ago. I don’t remember the bearish sentiment going down while the bulls are almost staying still, other than this week.

There is something going on. Neither number is extreme yet, but we will keep an eye on it. If anyone wants to know the website where you can pick up this information for free, just send me an email and I will forward it to you. It is two days delayed upon release, but it still good for free.

Have a great week end and we will be back at it on Monday.

http://www.screencast.com/t/eGLMnT56or Today’s equity chart