Monday, August 27, 2007

Today's Markets

I'm going to be doing this one a little backwards.

First, the markets have been in an uptrend since the Fed cut the discount rate. Despite today's sell-off, the SPYs are still in an uptrend. Here's the 5-minute daily chart going back to the day of the rate cut. Notice the outer trend lines are still very much intact.

Notice the market has rallied since about noon on Thursday. I added an arrow to this 3-day, 5-minute chart to show where the rally started. Seen through this three-day chart, today's action is a simple sell-off from a day-and-a-half rally.

Finally, here is a 2-day, 5-minute chart. Notice that despite the bearish news from the housing sector, the market found a bottom for most of the day. There was late day, high-volume selling, which should raise some concern. This indicates traders don't want to hold their positions overnight.

Here are a couple points of concern.

First, the Russell 2000 has traded sideways for the market advance. In addition, volume is very low. This indicates traders are shying away from the small caps for now. While this is to be expected because of the market sell-off, don't expect a big rally until investors are willing to move into the higher-risk small cap area of the market.

Here are the new highs/new lows charts for the NYSE and NASDAQ. Note that while the market advanced these indicators didn't. This indicates the number of new lows is at least equaling new highs which is not the sign of a bull run.



Finally, here is a chart of the SPYs with Fibonacci levels for the current advance. Here is what the dk Report said about the current market action.

An important consideration going forward is that V-bottoms are extremely rare. As the story goes, if money managers feel that a bottom is in play, they simply stop buying to get better prices. Without huge money, stock prices eventually slide, weak hands sell and the pros scoop up the slop at prices that interest them. In the world of TA, a double-bottom is born, and they're painful, uncomfortable experiences for the unprepared.

The rub is that the few times that V-bottoms actually work is during market events like this one. Two weeks ago, perfectly good positions were sold -- and perfectly bad ones were covered -- all to raise cash for reasons unrelated to those positions. The market hiccuped on non-fundamental selling, and this raises the odds for a spastic V-bottom to hold.