Thursday, November 29, 2007

Today's Markets

Good news today for the bulls. The markets didn't have a late day sell-off for a second day in a row.

The SPYs closed a touch lower. But they maintained their uptrend they started yesterday. On the negative side, the moving averages are pretty bunch-up right now, which indicates a lack of short-term direction.

The QQQQs had the best day of the averages (SPY and IWM). It's possible the average is forming a triangle consolidation pattern, but we'll need tomorrow's action to see for sure.

The IWMs closed down .5%. There are two trend lines in place. The lowest is the weakest because the space between the two points of contact with prices are pretty far apart. There is a second trend line in place which appears stronger because of more price contact and a closer spacing between the points of contact.

On the daily chart, note the SPYs broke their downward trend line of a few weeks duration. Prices are also over the 20 day SMA which they can use for support for a further rally or to prevent a drop into lower territory. Prices also gapped up yesterday which is a bullish sign.

The QQQQs had a stronger gap up and a stronger bar rallying from the 20 day SMA. The average is also above the 200 day SMA, keeping it in bullish territory.

The Russell 2000 broke its weeks long downtrend, but the average is still trading below the 20 day SMA.

So -- where do we go from here?

Let's start with a blatantly obvious observation: markets can move in three directions -- up, sideways or down (duh!!!).

Going Up: I'd assign this at most a 20% possibility. There is just too much bad news out there. Also consider today's GDP announcement and its lack of impact on the markets. If that news had come at the beginning of an economic expansion, the markets would probably have exploded. Instead we got a very lackluster response. I think the markets know that number is yesterday's news and the economy is going into a weaker period. In addition, there is a ton of bad news out there. This week's housing news was terrible and indicated we're nowhere near bottom. And the durable goods number was another bad number.

Sideways: Of the remaining 80%, I'd give this a 40%. Yesterday's dovish Fed speech ignited the rally and some of that is still there. So long as there is the possibility of another cut in the pike the market will have an implied floor somewhere.

Down: Only 40% left, isn't there? There's a ton of bad news out there still. For example, from the various estimates I have read of the sub-prime problem, it seems the median amount of predicted losses is about $300 billion or so. But we haven't seen more than $75 billion in announced writedowns yet. In other words, everyday it's possible we'll see a financial player announce a loss related to mortgage paper. In addition, the Christmas season news I have been reading is mixed. While shopping is pretty good, retailers are having to heavily discount, meaning profits might be really thin. And Sears' announcement today didn't help at all.

So, I think we're nearing the end of a sucker's rally. The question is do we trade sideways or move lower. At that point, flip a coin.