Heavy selling into strength for energy shares today. Will post details late tonight. A recent poster forwared Citi's call on energy and their call to lighten up; as such today I followed that advise and took my energy holdings down.... including all margin borrowing. Albeit C has blown a significant amount on bad loans, etc.. I find them spot on regarding energy.. been following them for a while..anyway FWIW the report caused me to start selling today.
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Wednesday, August 20, 2008
GETTING TECHNICAL
Looks Like the Summer Rally Is Over
The Market's Mood
By MICHAEL KAHN
Major indexes have moved below respective technical patterns to signal the likely end to the bear-market rally.
WHAT HAPPENED TO THE summer fun? Rather obvious technical patterns formed by the July-August rally have broken to the downside. From my point of view, the summer rally has run its course.
Perhaps everyone is already away on summer vacations and is having a hard time identifying pattern breaks on tiny little iPhone screens. But under the cover of light trading action in mid-August, the market is quietly changing its tone for the worse.
To be sure, anything can happen when volume is so light that the natural buffering effect from a liquid marketplace is not available to cushion news-driven shocks. Wednesday morning's crude-oil inventories report was one such "shock" as stocks initially cheered an increase in crude-oil supplies.
Let's go back to the start of the bear-market rally and its catalyst -- a huge rebound in the financial sector. When banks and brokers soared, the rest of the stock market went with them. Unfortunately, the opposite seems to be in effect this week. Banks, brokers, insurance companies and even real-estate stocks started to falter.
The Financial Select Sector SPDR exchange-traded fund (ticker: XLF) has already erased half of its summer rally. Don't forget that the other half of that rally was achieved in a single day, so a lot of expended trading energy has now been for naught. That is not a positive from a psychological standpoint, either.
A chart of the Standard & Poor's 500 index clearly shows the pattern breakdown mentioned earlier (see Chart 1). Chartists call it a "rising wedge" due to its shape, and it represents a countertrend move.
Chart 1
I have confidence in this classification as both volume and momentum indicators were falling throughout the move. This is classic behavior, August lull or not, as it results from reduced selling pressure rather than increased demand for stocks. After all, a true bullish trend exhibits increasing power (volume and momentum) as the desire to own stocks spreads across the marketplace.
Before moving on to what it means going forward, we must address the Nasdaq as it had been exhibiting more strength than the S&P 500. It also does not sport a wedge pattern of its own (see Chart 2).
Chart 2
Unlike the S&P, the Nasdaq rallied all the way up to its respective bear-market trendline and even poked its head above it for a day or two. However, it was unable to hold that tentative breakout and formed a bearish pattern on Japanese candlestick charts called an "evening star."
A candlestick, or candle chart, is merely a different and more revealing spin on the same open, high, low and close data seen in Western bar charts.
As the name suggests, an evening star appears as the "sun sets on the market." Comprised of a strong rally day, a tight range indecision day at new highs and then a strong down day, it is usually a good signal that the rising trend that preceded it has ended.
For the overall market, the question now is where is the market likely to go, assuming that rising wedge patterns have indeed been broken to the downside. While a short-term projection based on the size and orientation of any wedge pattern can be made, it is probably a better idea not to do so at this point. I think investors would be better served to stop taking risks, i.e., buying stocks, rather than trying to call a bottom.
The bear-market trend from the October 2007 peak is still in place, and that should be reason enough to once again focus on conserving capital.
However, for those interested in timing, I will refer back to a column written earlier in the year looking at a likely end of the bear market in the November time frame (see Getting Technical, "Timing Market Tops and Bottoms," April 16, 2008). It is far from a guaranteed prediction, but it does serve as a framework for portfolio positioning.
Above all else, nothing is guaranteed in the markets, and just because wedge patterns have been broken does not mean the bears have seized full control. But judging from the charts, they certainly have started to try.
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