Thursday, October 28, 2004
Technical Update
Looks Bullish Going Into Year-End
dated Oct 27
This surely has been a difficult market to read. Last Friday registered Real Distribution Days on both the S&P and NASDAQ, and with the S&P weekly close dangerously near the pivotal 1089/1090 support level, the market looked like it would break and flush everyone out. If you did not know that the put/call ratio actually fell to 0.74 on Friday and that the Investor's Intelligence weekly survey had registered excessive bullish sentiment, you would think you could almost smell the first hint of genuine fear in the air. Indeed, the setup going into the weekend was that if S&P 1089/1090 broke convincingly, there could have been more downside in store. As such, I opined that a prudent course of action would be to take partial losses on any longs and watch subsequent developments closely. I was hoping that the bulls (such as yours truly) could still have an oversold rally to bail them out. I was on the edge of my seat. Friday's RDD certainly spoilt the entire weekend for me.
Then Monday came along, and both the S&P and the DJIA registered an inverted graveyard doji. Normally, as I like to say, such a candlestick is interpreted as being bullish, but coming in such a persistent decline, I felt that it need not necessarily mean much. The VIX (volatility index), on the other hand, told a more interesting story. Despite Monday's flattish market action, the VIX spiked up and held at the highs of the trading session. For the bulls, this was a positive sign as it showed that people were beginning to get more cautious. But with other sentiment indicators still registering overly bullish sentiment and intermediate-term indicators still heading down in a persistent fashion, I was of the opinion that we were not out of the woods yet. The only reasoning for my holding on to longs was that the short-term indicators such as the McClellan Oscillators based on either breadth or volume are showing positive divergence against the S&P daily lows registered on Oct 19 and Oct 22, and that they are still oversold (though not maximally so).
On Tuesday, the S&P issued a Real Accumulation Day. In fact, it was a trend day to the upside. More importantly, the RAD issused by the S&P occurred from the key 1094 level, and fully offset the previous RDD with the S&P closing above 1108.30 (which was the high of the previous RDD). Incidentally, 1108 is also the level around which the S&P monthly chart turned up in September. With the S&P closing near another pivotal level, namely 1111, it is clear that he oversold rally is already underway. If the rally sticks, then the scenario will only get more bullish because:
(i) continued bullish action from here on will indicate that the zone of critical support 1094-1104 which I identified a couple of weeks ago has been successfully defended;
(ii) continued bullish action will also imply that the S&P embarked on a bullish reversal after turning down its monthly chart on Oct 20 trade below 1099.
If the S&P can now trade (and preferably close) above our old friend and corner number 1123, then it would offset yet another RDD and also break the neckline of an inverted head-and-shoulders pattern on its daily chart. If this occurs, I would get so bullish you would think I had opened a ranch in outback Texas.
The fact is, the date Oct 26 squares the intraday high of S&P 1163 scored this year. Furthermore, the S&P weekly closing high for this year is 1157, which is not only a corner number, but which squares the date Nov 7. Although just last week there had been a better-than-average chance of the S&P making new lows for 2004, we must recognize that time is more important than price in identifying a potential low, and that this timeframe Oct 26-Nov 7 may well contain a significant intra-swing low. Going into mutual fund year-end closing and markups, as well as the Nov 2 election, this would not be surprising.
For now however, I must necessarily draw your attention to the market negatives, after extolling its positives. First off the bat, sentiment is still at extreme bullishness, and for the market, if this persists, it would lend credence to the idea that rallies from here are not put of a new bull run, but will ultimately fail. Intermediate-term indicators are still falling, although somewhat more slowly now. Quite a bit of the overbought condition since early October has been worked off, but these indicators will not be oversold until at least a week after the election. Also, the four RDDs scored by the S&P is close proximity since Oct 6 suggests an intensity of selling pressure that can only be truly and surely exhausted by capitulation and panic. We have seen neither so far.
This suggests to me that an oversold rally from here might fail and give way once again with the S&P probing critical support in the 1089-1101 region. This view would be challenged if the VIX continues to go up and get jumpy. However, I am still of the opinion that any sharp upmove from here that fades the S&P 1118-1123 level will only delay the inevitable. On the other hand, if the S&P tests and hold critical support yet again, in so doing making both short and intermediate-term indicators oversold and finally driving a stake through bullish sentiment, and if the S&P reverses and embarks on a successful test and close above 1123, then it could lead to one of the most powerful rallies we have seen since 2003. Again, time is more important than price. I do not want the S&P to break 1123 now. This would be premature and more indicative of a failing rally, although I could be wrong on this scoree. I would prefer the S&P to decline first, flush out the bulls, and then break 1123.
The course of action would now be to take partial profits on longs, and go to cash as the market finishes off this oversold rally.
Looks Bullish Going Into Year-End
dated Oct 27
This surely has been a difficult market to read. Last Friday registered Real Distribution Days on both the S&P and NASDAQ, and with the S&P weekly close dangerously near the pivotal 1089/1090 support level, the market looked like it would break and flush everyone out. If you did not know that the put/call ratio actually fell to 0.74 on Friday and that the Investor's Intelligence weekly survey had registered excessive bullish sentiment, you would think you could almost smell the first hint of genuine fear in the air. Indeed, the setup going into the weekend was that if S&P 1089/1090 broke convincingly, there could have been more downside in store. As such, I opined that a prudent course of action would be to take partial losses on any longs and watch subsequent developments closely. I was hoping that the bulls (such as yours truly) could still have an oversold rally to bail them out. I was on the edge of my seat. Friday's RDD certainly spoilt the entire weekend for me.
Then Monday came along, and both the S&P and the DJIA registered an inverted graveyard doji. Normally, as I like to say, such a candlestick is interpreted as being bullish, but coming in such a persistent decline, I felt that it need not necessarily mean much. The VIX (volatility index), on the other hand, told a more interesting story. Despite Monday's flattish market action, the VIX spiked up and held at the highs of the trading session. For the bulls, this was a positive sign as it showed that people were beginning to get more cautious. But with other sentiment indicators still registering overly bullish sentiment and intermediate-term indicators still heading down in a persistent fashion, I was of the opinion that we were not out of the woods yet. The only reasoning for my holding on to longs was that the short-term indicators such as the McClellan Oscillators based on either breadth or volume are showing positive divergence against the S&P daily lows registered on Oct 19 and Oct 22, and that they are still oversold (though not maximally so).
On Tuesday, the S&P issued a Real Accumulation Day. In fact, it was a trend day to the upside. More importantly, the RAD issused by the S&P occurred from the key 1094 level, and fully offset the previous RDD with the S&P closing above 1108.30 (which was the high of the previous RDD). Incidentally, 1108 is also the level around which the S&P monthly chart turned up in September. With the S&P closing near another pivotal level, namely 1111, it is clear that he oversold rally is already underway. If the rally sticks, then the scenario will only get more bullish because:
(i) continued bullish action from here on will indicate that the zone of critical support 1094-1104 which I identified a couple of weeks ago has been successfully defended;
(ii) continued bullish action will also imply that the S&P embarked on a bullish reversal after turning down its monthly chart on Oct 20 trade below 1099.
If the S&P can now trade (and preferably close) above our old friend and corner number 1123, then it would offset yet another RDD and also break the neckline of an inverted head-and-shoulders pattern on its daily chart. If this occurs, I would get so bullish you would think I had opened a ranch in outback Texas.
The fact is, the date Oct 26 squares the intraday high of S&P 1163 scored this year. Furthermore, the S&P weekly closing high for this year is 1157, which is not only a corner number, but which squares the date Nov 7. Although just last week there had been a better-than-average chance of the S&P making new lows for 2004, we must recognize that time is more important than price in identifying a potential low, and that this timeframe Oct 26-Nov 7 may well contain a significant intra-swing low. Going into mutual fund year-end closing and markups, as well as the Nov 2 election, this would not be surprising.
For now however, I must necessarily draw your attention to the market negatives, after extolling its positives. First off the bat, sentiment is still at extreme bullishness, and for the market, if this persists, it would lend credence to the idea that rallies from here are not put of a new bull run, but will ultimately fail. Intermediate-term indicators are still falling, although somewhat more slowly now. Quite a bit of the overbought condition since early October has been worked off, but these indicators will not be oversold until at least a week after the election. Also, the four RDDs scored by the S&P is close proximity since Oct 6 suggests an intensity of selling pressure that can only be truly and surely exhausted by capitulation and panic. We have seen neither so far.
This suggests to me that an oversold rally from here might fail and give way once again with the S&P probing critical support in the 1089-1101 region. This view would be challenged if the VIX continues to go up and get jumpy. However, I am still of the opinion that any sharp upmove from here that fades the S&P 1118-1123 level will only delay the inevitable. On the other hand, if the S&P tests and hold critical support yet again, in so doing making both short and intermediate-term indicators oversold and finally driving a stake through bullish sentiment, and if the S&P reverses and embarks on a successful test and close above 1123, then it could lead to one of the most powerful rallies we have seen since 2003. Again, time is more important than price. I do not want the S&P to break 1123 now. This would be premature and more indicative of a failing rally, although I could be wrong on this scoree. I would prefer the S&P to decline first, flush out the bulls, and then break 1123.
The course of action would now be to take partial profits on longs, and go to cash as the market finishes off this oversold rally.
Monday, October 25, 2004
Technical Update: Fooled by Randomness
dated Oct 25
After Friday's disastrous market action, one might think an oversold rally is way overdue. But we are not out of the woods yet.
First, look at the sentiment front. The put/call ratio DECLINED on Friday to 0.74 from a Thursday reading of 0.81. Folks actually had the nerve to shrug off the market decline. The put/call reading now shows a negative divergence against previous market action. It is now the lowest in one month, although the market has itself declined to a monthly low. People are supposed to get bearish as the market drops, not more bullish as they seem to be now.
Furthermore, the Investor's Intelligence weekly survey chimes in at excessive bullish levels, with 58.9% bulls and 22.1% bears. The market in the past had gone up despite such bullish readings, but coming in at a time like this in the midst of a persistent decline is definitely not good. It might mean the decline will only get more persistent.
There were probably a whole lot of dip-buyers out there who were seduced by the relative strength in technology stocks and bought every dip along the way. Now those who have not yet cut their losses are in a serious fix. That, by the way, includes yours truly.
The short-term indicators such as the McClellan Oscillators based on either breadth or volume are showing a positive divergence against price action recorded on Oct 19 and Oct 22, in that the market has made lower lows on these dates while the oscillators made higher lows. That is a plus factor.
The S&P is now set to probe critical support at 1089/1090. If this holds and the S&P rebounds, there is still hope for an oversold rally to give a graceful exit for the trapped bulls. However if this level fails, then we could see S&P 1077 at which exists an unfilled gap dating back to August.
While it is possible to rally now, I cannot rule out the possibility of further downside action to shake out more bulls and induce some real level of fear and panic. October typically is a month that takes no prisoners, whether on the upside or on the downside.
Like I said earlier on some weeks back, and which seems to hold true even today, the S&P has thus far been unable to capitalize on a bullish election year template in rallying to new highs. Rebounding in August off a swing low of 1060, the S&P carved out a bullish 1-2-3 Swing-to-a-Test pattern and made not one, but two attempts to stage a Rule-of-Four breakout over the 3-point declining trendline defined by the March, April and June highs. However the first breakout attempt failed and the second one succeeded only marginally before the rally reversed course spectacularly. The bears successfully defined 1040, and in so doing, generated pattern-failure and consequently, accelerated downside momentum. A further continuation of downside momentum going into year-end will confirm that the secular bear market has indeed resumed. In the short run, the market may be a voting machine, but in the long run, it is a weighing machine.
The slippery slope is still in operation and it appears more and more likely each day that new yearly lows will be carved out on the S&P, especially after the decisive break of S&P 1100/1101. My strategy now will be to take partial losses on long positions and close out the remaining if prices go higher during an oversold rally. A succeessful holding of 1089/1090, or a successful test of 1077 followed by a rebound will again be a short-term buying opportunity. It has not been easy to game this market.
dated Oct 25
After Friday's disastrous market action, one might think an oversold rally is way overdue. But we are not out of the woods yet.
First, look at the sentiment front. The put/call ratio DECLINED on Friday to 0.74 from a Thursday reading of 0.81. Folks actually had the nerve to shrug off the market decline. The put/call reading now shows a negative divergence against previous market action. It is now the lowest in one month, although the market has itself declined to a monthly low. People are supposed to get bearish as the market drops, not more bullish as they seem to be now.
Furthermore, the Investor's Intelligence weekly survey chimes in at excessive bullish levels, with 58.9% bulls and 22.1% bears. The market in the past had gone up despite such bullish readings, but coming in at a time like this in the midst of a persistent decline is definitely not good. It might mean the decline will only get more persistent.
There were probably a whole lot of dip-buyers out there who were seduced by the relative strength in technology stocks and bought every dip along the way. Now those who have not yet cut their losses are in a serious fix. That, by the way, includes yours truly.
The short-term indicators such as the McClellan Oscillators based on either breadth or volume are showing a positive divergence against price action recorded on Oct 19 and Oct 22, in that the market has made lower lows on these dates while the oscillators made higher lows. That is a plus factor.
The S&P is now set to probe critical support at 1089/1090. If this holds and the S&P rebounds, there is still hope for an oversold rally to give a graceful exit for the trapped bulls. However if this level fails, then we could see S&P 1077 at which exists an unfilled gap dating back to August.
While it is possible to rally now, I cannot rule out the possibility of further downside action to shake out more bulls and induce some real level of fear and panic. October typically is a month that takes no prisoners, whether on the upside or on the downside.
Like I said earlier on some weeks back, and which seems to hold true even today, the S&P has thus far been unable to capitalize on a bullish election year template in rallying to new highs. Rebounding in August off a swing low of 1060, the S&P carved out a bullish 1-2-3 Swing-to-a-Test pattern and made not one, but two attempts to stage a Rule-of-Four breakout over the 3-point declining trendline defined by the March, April and June highs. However the first breakout attempt failed and the second one succeeded only marginally before the rally reversed course spectacularly. The bears successfully defined 1040, and in so doing, generated pattern-failure and consequently, accelerated downside momentum. A further continuation of downside momentum going into year-end will confirm that the secular bear market has indeed resumed. In the short run, the market may be a voting machine, but in the long run, it is a weighing machine.
The slippery slope is still in operation and it appears more and more likely each day that new yearly lows will be carved out on the S&P, especially after the decisive break of S&P 1100/1101. My strategy now will be to take partial losses on long positions and close out the remaining if prices go higher during an oversold rally. A succeessful holding of 1089/1090, or a successful test of 1077 followed by a rebound will again be a short-term buying opportunity. It has not been easy to game this market.
