Friday, March 7, 2008

Don't Jump the Gun

In my opinion this is a very dangerous market. It is oversold enough to have a good bounce but sentiment is so poor it could just as well crash. Yes AAII investor sentiment numbers are at the lowest point since 1990, but this can persist for a couple of weeks and the DJIA could happily trim off another thousand points in the blink of an eye. The unemployment numbers Friday didn't help general sentiment on main street, which is exhibiting a growing fear over future economic conditions, I cannot discount the fact that this anxiety may push the indexes lower.

The cycles look like they are working fairly well once I readjusted the earlier 55 bar to 56 bars. The one marked 59 is actually 58.6 bars or roughly 9.77 trading days. The SPX eeked out a minor bottom and turned higher late in the afternoon more or less on schedule. Next up is the 66 bar cycle, 11 trading days, which is due late Monday. I've marked out a potential symmetry which aligns the last high and reaction low with the upcoming projection. Unless something positive happens in the banking industry over the weekend, not likely in my opinion, the markets should trade lower on Monday, for at least part of the day.

On Friday, the SPX closed below the lower 20 day Bollinger band, this is not good. This kind of an event has a couple of possible outcomes. The first is an outright crash, 1987 is the famous example. The second, and more likely outcome, is that the market snaps back above the Bollinger band like it did in January and then retests the low a few days later. Regardless, it indicates that Fridays low will be tested again which means there is no big rush to jump in the water while the sharks are still circling.

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The McClellan Oscillator is finally becoming oversold enough for an intermediate term bottom. However, it is also indicating a very weak market, with the 10% Index crashing below the -500 threshold during Fridays trading session. Only the positive action from late afternoon rally managed to keep it above the -500 zone. On the plus side, so far we still are seeing postive divergences in the MCO behavior. Like I said there is no rush, but we are starting to see the kind of setup we want to see for a decent intermediate term rally. Just because it looks like it today does not mean it will happen, we will have to wait and see.

We have also had two days where the down volume to up volume ratio was over 10 to 1. There is statistical evidence that this is a bullish event, indicating a washout of selling activity. I would also note that in the recent past I recall several 10 to 1 down days which were cut short by traders jumping the gun, antcipating a rally, this didn't occur last week, indicating to me that the players are cautious if not outright scared.

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