Gap up - close down
The market gapped open higher on Friday, mainly because of a few
solid earnings reports announced after the market closed on Thursday,
but things went south quickly and closed deep in the red once again.
Friday witnessed a second outside day in
just three days. Outside days are not too common, so two in three
days is rare. An outside day is when the market, in this case the
S&P 500, makes a high that is above the previous day's high, but also
makes a low below the prior day's low. It tends to be a reversal
formation, but Wednesday's finished on the high end, and Friday's closed
on the low end making things even more confusing.
Chart provided courtesy of
www.decisionpoint.com
The bounce we are saw was on a decrease in volume, but Wednesday's
volume was so high, that a decrease was to be expected. We
were looking for a move back up to at least the neckline on lower
volume, which is typical action for a broken head and shoulders
pattern, but we didn't quite make it to the neckline. I can
see a move up to the 1380 area as that is where the neckline is
currently, plus that would be a 50% retracement of the losses since
the late December peak near 1500.
The market is not overbought in the short-term (days), nor the
intermediate-term (weeks) but we did see overbought readings on the
shortest-term (intra-day) indicators on Thursday and Friday morning,
and the market responded by selling off. You can see below
that the intermediate-term (red lines) has hit resistance and that
could mean another move back toward oversold. So, while we are
not seeing overbought readings, the high end of the trend is moving
down so we may not get very overbought on any rally before we sell
off again.
Chart provided courtesy of
www.decisionpoint.com
That is not a great thing as it means people continue to sell into
strength. We saw a nice day and a half relief rally on
Wednesday afternoon and Thursday, which many considered a short
covering rally - meaning traders who have bet against the market
were taking profits, which gives the illusion of buying rally.
But that just gave investors a reason to sell.
I am not ruling out another rally as
we have come down pretty hard, quite quickly. Even if we are
indeed in a bear market / recession, the market does not go straight
down. We have a lot of stimuli on the calendar this week that
could make the market go either way. The FOMC meeting will be
held Tuesday and Wednesday of this week with the interest rate and
policy statement announcement at 2:15 PM ET on Wednesday.
We have the January jobs report on Friday, and we are also in the
thick of earnings season. Plenty of catalysts.
Plus, the seasonality chart at the bottom of this page shows that
late January can be very strong historically. Not that this is
a typical year.
The market has obviously made it to the center stage recently with
all the talk of a possible recession, continued concerns over the
housing market and credit crisis, and a band-aid tax rebate plan
from the government. I won't get into how terrible an idea I
believe that is, but let's just say this will probably prolong the
problems after all is said and done. But I look at this a
possible positive going forward, at least in the short-term.
Just as sentiment surveys work as contrarian indicators, as the
financial news gets worse and worse and becomes more Main Street
news rather than just Wall Street, the more likely it is that we
could see a little rebound. It's kind of like when house
flipping shows were topping the TV ratings, we knew the
the housing market bubble was nearing an end.
The TSP Talk Sentiment Survey
came in with a 1.06 bulls (43%) to
bears (41%) ratio, which keeps the system on a buy signal and a 100% S-fund
allocation for this week. I have been considing changing the
1.25 and 2.0 ratio levels as buy/sell signals for markets in a downtrend -
perhaps when the 50-day moving average is below the 200-day moving
average. Obviously during an uptrend, people are more quick to
turn bullish during rallies, and when in a bear market, sentiment is
quick to turn overly bearish. I'll play with the numbers and
see if a change would pay off for us.
Bottom line: Caution and capital preservation should be your
main concern right now. But look for a rally within the next
week or two that may be quite strong. These rallies will seem
enticing, and they can be played, but don't get married to the bull
side until the charts start to improve. Look to sell strength
until then.
That's all for today.
See you tomorrow.
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Chart provided courtesy of
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