THE MARKET:
The slugfest continued Friday, but it was no clear, one-sided move. Kind of fitting given the back and forth action day to day. Stocks started stronger, turned negative, then rallied back to close at session highs. The intraday and day to day action shows the same volatility.
When all was said and done there was really no change in the market's situation: the indices are still in downtrends, they are still bouncing back and forth and showing some signs of a backbone developing, and leaders are still mixed in their action with some breaking down and some breaking out.
The action of oil, the speculation about just one more rate hike, the Chinese announcement that it could float the yuan at "any time," and yet another turn around on volume was very interesting. The new twist in the technical action was the action around the recent lows. NASDAQ undercut its recent lows and rebounded for a gain. SP600 and SOX did the same thing: undercut and rebound. SP500 did not undercut, but instead held above its recent lows and the August 2003/August 2004 up trendline and surged back for a strong gain on very strong volume. The mid-cap SP400 slightly undercut, but it held its 200 day SMA on the intraday low and surged back up. The action in both of these indices formed a short, two week double bottom that could initiate a more sustained move off of this test.
How sustained? It can produce a significant rise. Back in Q1 2001 after the market had sold hard from the double top that formed with the September 2000 peak, SP500 formed a similar 2 week double bottom and rebounded for a 200 point gain. That move ultimately failed to deliver an end to the downtrend; too short to do that, but it did give rise to a solid rally. In February 2002 as the market tried to recover it tested the move off of the 2001 low with another 2 week double bottom. That short pattern delivered a 100 point move, but it too failed to turn the tide. It was not until the larger 2.5 month double bottom spanning July to October 2002 did the market bottom. That type of more sustained bottom is what we want to see from this move as it sets up a longer term rise. It is not always the case, but it does provide a better foundation to support a longer upside move.
In any event SP500 and SP400 showed some good technical action, both holding key support levels and rallying sharply on the best volume in two weeks. With the sentiment indicators moving higher they may have bottomed near term. The sentiment indicators did not reach much higher, and we really wanted a strong blowout session. Now we anticipate a rebound but will need to see a follow through next week. Whether this ends the selling is dubious; a more sustained rally and then a further test is likely.
MARKET SENTIMENT
The sentiment indicators continue to line up together, and that is what you want to see in order for them to have meaning. With sentiment there are two factors: first they have to get to extreme levels to have any real meaning. Second, the majority of the sentiment indicators need to 'line up' together. In other words, they need to all start showing more extreme indications. For example, the put/call ratio has remained very high for a few months, and has shown almost 10 closes above 1.0. That indicates there is excess downside speculation. At the same time, however, bulls/bears remained too high and low respectively, and volatility was hugging the flat line. Now that they are all starting to move we may see some movement in the market as well. Back in August 2004 they came together as well when volatility jumped to 20 from near 13, the bulls and bears closed the gap to the lowest since 2002, and the put/call ratio spikes. That immediately preceded the August to December run in the market.
Bulls versus Bears:
Big drop in bulls the past week, coming in at 44% and down from 48.4%. The low on this recent drop before last week was 46.2%. In August 2004 when NASDAQ bottomed Bullish sentiment hit 40%. Bullishness was falling and heading back toward that level, but as with volatility and the other sentiment indicators it was cut short by the rally attempt. Now bullishness is heading back down with the quick failure of that bounce.
Bears rose to 29.7%, up from 26.9% and just edging out the prior week's 29% reading. Back in August 2004 bears rose to 30%; the bears are right there and the bulls may have been close enough last week to do the trick. Would have preferred to see them slice through those levels to really show some heightened anxiety even below 2004, but nothing is every perfect in the market.
Volatility could not make it above 17 intraday, barely clipping the Thursday level. Hardly extreme and nowhere near the 25 to 30 level we would have really liked to see.
VIX: 15.31; -1.55
VXN: 18.54; -1.59
VXO: 15.18; -1.38
Put/Call Ratio (CBOE): 1.01; -0.12
Again, it is important to keep these indicators in perspective. We like to talk of getting to a level to turn the market. These are secondary indicators, meaning they show us possibilities to turns, alerting us to potential change. The nuts and bolds of the market, e.g. price and volume, leadership, have to show the move is underway.
NASDAQ
Undercut the recent lows and then rebounded on strong volume to post a nice gain. Good reversal and actually a better double bottom than SP500 given the undercut and reversal. The idea of a double bottom is to scare them out, and the undercut of the recent lows is the type of action that does that.
Stats: +17.47 points (+0.92%) to close at 1921.65
Volume: 2.119B (+10.08%). Volume surged to the best level since the April 15 sell off. Didn't make much of it at the time, but a tax day sell off seems appropriate. In any event this was a high volume breach and recovery. After back and forth accumulation and distribution this could have been the near term flushing of the system to allow NASDAQ an attempt to rally a bit further.
Up Volume: 1.413B (+1.032B)
Down Volume: 648M (-879M)
A/D and Hi/Lo: Advancers led 1.5 to 1. Pretty meek breadth, but it was fighting to recover all session.
Previous Session: Decliners led 2.93 to 1
New Highs: 26 (-3)
New Lows: 224 (+7)
The Chart: The Chart: investmenthouse.com^ixq.html
NASDAQ looked bleak early with another reversal from gains to a sell off, this one undercutting the earlier April low at 1904, hitting 1889 on the low. As is often the case with breaks below support all are watching, when it occurs the shorts cover and send it right back up. With this strong volume reversal that led to a nice gain, this time we see if there are some legs. Step one is moving past the 18 day EMA (1947) where it stalled just over a week back; it has to take out that point to show the downtrend is weakening. Then it can work on 1973 (bottom of recent trading range that failed in early April), the 200 day SMA (1990), and the other stiff overhead resistance it has built for itself.
Very similar action on NASDAQ 100 with the undercut of the recent low, moving below 1400 and then rebounding furiously for a nice gain.
SOX showed similar action, undercutting the lows of its 5 month trading range at 380 but then reversing. Lagged all session, and its final gain was modest (1.31 points), but its action mirrored the moves by the stronger indices. Maybe this is the move that sends it back up toward the top of its trading range at 450. That would be a sweet trade. Indeed, a move up to the 200 day SMA (407) would not be bad.
SP500/NYSE
This was the focal point as it held above the recent low and up trendline and blasted higher on strong volume.
Stats: +13.63 points (+1.19%) to close at 1156.85
NYSE Volume: 1.879B (+7.37%). As with NASDAQ, the best volume since the April 15 tax day sell off. Good to see the best volume in two weeks on a test and recovery. That shows strong covering and perhaps some buying. After the back and forth sessions this solid showing tells us to get ready for a rebound. Will have to show a follow through next week, but it is a good start.
Up Volume: 1.61B (+1.225B)
Down Volume: 716M (-1.058B)
A/D and Hi/Lo: Advancers led 1.99 to 1. Pretty decent breadth with the small caps lagging.
Previous Session: Decliners led 2.2 to 1
New Highs: 44 (+12)
New Lows: 137 (-7)
The Chart: investmenthouse.com^spx.html
We have pretty much hashed this one out thoroughly, but to recap, a hold above the recent low (1136) and the August 2003/August 2004 up trendline (1138) and then a strong, high volume recovery. Closed at the session high and took out the 200 day SMA (1155), though the latter means little in the recent action. The move sets up a challenge of the head and shoulders neckline (1164) and then the 50 day EMA (1174). Needs to clear the 50 day EMA to really start breaking up the recent downtrend.
SP600 undercut 300, continuing the Thursday breach of the early April low. It recovered along with the market but was lagging. Next key test is at 310. The small caps are really laboring, lagging behind the large caps. In a recovering economy the small caps lead. With the current concerns about a slowing economy now and into the future the small caps have come under considerable pressure.
The mid-cap SP400 actually looks similar to SP500. it tested lower Friday with the intraday low just barely undercutting the early April low on that burst of selling that took the entire market lower. It tapped the 200 day SMA (663) on the low and rebounded for a nice gain.
DJ30
DJ30 held above 10,000 on this test, turning higher Friday on rising, above average volume. Just a start at this point as it moves to test the 18 day EMA (10,247) and then the 200 day SMA (10,374) that is coincident with the neckline of the head and shoulders pattern it broke down from three weeks back. As with SP500, a solid start to a recovery.
Stats: +122.14 points (+1.21%) to close at 10192.51
Volume: 303 million shares Friday versus 279 million shares Thursday.
The chart: investmenthouse.com^dji.html |
