Nov. 6, 2006 - Last week started on the heels of bearish engulfing candles from the previous Friday. We were looking for a small follow through day. After a half-hearted attempt at retesting the highs, the charts did make fresh lows for this corrective pattern. However, we did not develop the type of selling we saw in May and June. So far my outlook for a muted correction is on target.
As usual, I look to the Philadelphia Semiconductor Index (SOX) for clues, as it tends to lead technology both to the upside as well as down. This index has not confirmed any of the highs made by the major averages during this cycle. Only when it finally turned down on October 27 did the other averages follow suit. If you've noticed, it hasn't exactly collapsed either. Friday's low did not create fresh lows in the momentum indicators, which suggest downside momentum is waning.
During this sequence we've seen options bears attempt to short the retest of the high only to see options bulls attempt to buy the dip a day later. The results of this kind of tug of war leads to little or slow progress in either direction, which is frustrating to both bulls and bears. This was apparent in the daily candles, which had small real bodies on Thursday and Friday. I stated here last week I felt we entered into a period of choppy consolidation. The implication is the uptrend is still intact but a corrective phase would relieve the extremely overbought condition. Since this has happened, the next question is where and when does this correction end? What usually happens in these types of patterns is they continue down the winding road until such time the negative sentiment gets so thick you can cut it with a knife. Obviously, we are not there yet. What would it take to get there? This week is the election and the possibility of a Democratic win and potential sweep of both houses of Congress could do it. Another possibility is ballot confusion where the outcome remains in the balance. This sequence may imitate our usual Fed meeting drama where the market waits on the outcome during the first part of the week.
I look to news events to support the technical and cyclical picture, not the other way around. What I see is a correction that is now six days in duration. I also see the Nasdaq having hit a small degree target at price point 2316. There is another larger degree support zone from 2285-2300. The picture is the same in the NDX. It has hit a near-term target near 1693 but has larger Fibonacci support at 1670-85. An eight-day down cycle would culminate on Tuesday night to Wednesday morning, which does line up with the election results.
While we may have hit the first level of price targets, the small body candles don't offer us any relief in the form of a reversal back to the upside either. The implication is we continue to stall for another day at least but I would look for another leg down to these larger targets. Whether that coincides with a news event I can't say, but it could accomplish the kind of sentiment that would turn the markets back up.
