Remember the old game show where you had three individuals claiming an identity, and two of them were imposters? Hollywood luminaries such as Kitty Carlisle sat on the panel well past the height of their fame. Finally, two contestants would bluff and one would be left standing. The show was called "To Tell the Truth." This is the exact scenario we have starring on Wall Street this week.
We are now 13 trading bars off the low and usually we will get what the Investors Business Daily calls a “follow through day” on one of my high probability rotational bars. Since Friday was day 13, we had the opportunity to do so, but the markets did not. The problem is that if we don't come out of the chute like a race horse, there is a good chance we won't get that follow through day until Friday, if at all. When we get a low like the one at the end of January, I look for the bars to rotate and when we pull back or spike into an important time window (on a small scale), this is one way of recognizing an important change in trend. I believe the IBD looks for these turns within four days of a low but I've greatly expanded on that philosophy. The truth is, most serious breakouts materialize on either day 7, 8, 11 or 13. If they don't then we are looking at the 17 to 18 day window. Now Monday is a 13+1 so it can happen and we are set up for it, but up to this point, the markets haven't shown us any inclination they are going to do it. Just for the moment, let's say we don't go down but can't break out either until Friday. That implies this could be one boring week. Somehow, I don't think that is going to happen.
Last week the theme was a test of overhead resistance. The Dow was sitting right near the November low of 12724. Based on the activity leading up to that point it was reasonable to think the test might come right near that level as bulls attempted to break through. However, the markets got a knock out punch right from the start and spent most of the week on the run. It was stated here the Nasdaq couldn't go down if the SOX stayed up. The SOX finally did break above a base it was building since the low and looked like it was ready for a serious bounce attempt. But the other side of the coin states that the Nasdaq will have a hard time staying up if the SOX falls back to earth. The SOX breakout utterly failed and instead retested the bottom, missing by two points.
What we have now is a market that attempted to hang with overhead resistance and couldn't. We now also have a market that has retested the low and held. That is a recipe for a trading range. My interest in all of this is to see that we sufficiently work off the extremely oversold conditions from late January. We have, to a certain extent as daily RSI levels have elevated to 39 in the Dow and 36 in the NDX. We are no where near euphoria but if these markets want to crash and burn, conditions do exist for a chronically oversold condition. The result would likely be an oversold condition even more extreme that the one from two weeks ago.
But Friday offered bulls a ray of hope as the tech indices actually led to the upside. If you watched the ticker most of the day, we had a situation where the Dow was down, S&P500 was down and the Nasdaq was up. We haven't seen that lately. On the other side of the coin, tech suffered a larger meltdown than the other sectors of the market. Is this a case of tech trying to lead or just coming back to mediocrity?
The challenge coming into the week is we have conflicting indications. On the one hand, we do have tech trying to stage a rebound. On the other hand, did you see the weekly candle put in on the Dow? If we have to judge the market solely on that bit of new information, we can only conclude the Dow is going to retest the lows and that 200-week moving average. But the weekly NDX has a lower tail which implies it tested support and wants to hold for now. In the past couple of sessions, the put/call ratio has elevated suggesting options players do not believe in the bounce. As we know, they are usually wrong.
I've been paying careful attention to the bond market which has for the most part going the opposite way of stocks. It has made a virtual triple bottom on Jan. 25, 30 and last Thursday. It has been threatening to break to the down side, thus sending yields higher since it failed last Tuesday on the 162nd day off last year's low. On Friday, it made a weak bounce attempt. Friday's high tick was 89 hours off the top. If it’s going to fail, this is the place for it. If it’s going to fail, they likely beneficiary would be the stock market.
When I go to my NQ (Nasdaq E-MINI) chart, we closed the week 63-15 min bars off Thursday's low. What that means is we are now testing a small degree triple top of resistance near 1785 on an intra day basis. In the NDX this is 1780 and if you go to the equivalent Dow chart you'll see we've fallen back from 12331. In other words, tech looks better, but it’s based on only one day.
So here's where we stand. With the bond market and NQ both testing time resistance, one of them is due to fail. The greater likelihood here is that the bond market will fail. If that materializes, it would allow tech to stay in the trading range at least for the first part of the week. At the rate we have been going, it looks like the best these markets can do is go sideways to work off the oversold condition. As we are in a Mercury condition until Feb. 19, the highest probability remains a whipsaw market. My next big time window commences the week after President's Day which is the 260th week off the March 2003 low and my larger outlook was to see if this bounce can survive until then. Theoretically, with the plus or minus one aspect of time windows we have one week to go as next week will be week 259.
Watch the bond and the NDX very carefully as those charts should be driving the action on Monday morning and may very well set the tone for the week. In the near term, my indicators are across the board. On Thursday night, my stance was a very slight positive bias. This is exactly what happened on Friday. This stance hasn't changed but overall I'm still looking to be locked in the trading range between the highs and lows set since the big low. Another possibility is tech holding its ground while the Dow continues lower as it did on Friday. That would be a bifurcated market scenario, which can't be ruled out.
Next week is the Trader's Expo, finally. Aside from your's truly, there will be the biggest gathering of trading educators under one roof for the entire year. Yes, even bigger than Las Vegas. I'm told New York is the granddaddy of them all. I'm honored to be a part of it. The host of this column, Futures magazine will also be having a panel discussion. This column will return in two weeks.
Jeff Greenblatt
Fibonnacci forecaster
Here's the link and there is a short interview I did with Dan Collins at the Las Vegas Show in 2006:
http://www.moneyshow.com/msc/nyot/spkrProfile.asp?spkrID=21729OTE
