As I’m flipping through a few charts this morning on the deck while marinating steak for dinner tonight, I noticed one specifically that really epitomizes what was the bullish case for this market, until Friday afternoon.  It represents exactly why I will not get involved in this market to the long side until we see several days of sideways action after good movement off oversold levels.

The market has not been able to hold a bid while sellers were present for more than three months now.  Moves to the upside have come swiftly and on very one sided up/down volume ratios.  This represents a market where sellers step to the side for a few days, completely, allowing fast money to take the market higher.  When that fast money runs out of gas, the sellers step back in, and we see days like Friday.  Notice in the S&P 500, we have not had many minor sell offs on light volume over the last three months.  When the fast money gets exhausted, there’s no underlying bid, they just pull it and down we go, on high volume.

Back in February, before the big March rally, we saw four days of light volume movement to the downside in an organized fashion.  This got me extremely bullish, I loaded the boat to the long side, and made my whole year in the following month and a half.  I haven’t seen this type of action in the past three months, where the market holds a bid after making a move off the lows.  Thus, I have not gotten bullish and won’t put on significant long exposure.

So I’m flipping through my long side watch list and The Cheesecake Factory (CAKE) comes up.

After moving below the 200 day moving average a few weeks ago, CAKE broke through the downtrend line on Wednesday after some good same store sales numbers and multiple upgrades.  It also moved back above the 50 day moving average.  I put the stock on my list at that point, looking for some sideways consolidation on light volume.  This was generally the bullish case for many of the better relative strength stocks.  After strong moves off the bottom, some on decent volume, these stocks gave back very important support levels on Friday, on high volume.  Instead of moving sideways, bids evaporated, and the fast money sold out.

I fully expect further price action to the downside now.  The next bullish case would be for these stocks to hold their early June lows and form inverse head and shoulder patterns.  Specifically in CAKE, look for the 200 day moving average to hold next week.  I wouldn’t look to get involved until stocks showing this type of pattern break back above yesterday’s high.

Until then, chill out.