Someone forgot to tell Wall Street this is final exam season. Last week the markets finally cracked and any number of reliable indicators which validated rallies during this decade started taking on water. On the top of the list would have to be the 200 hour moving average in the Dow. A reliable indicator throughout 2007 and since April 15, it had the biggest violation since the bear stretch which started in October. You may remember the 200hma was tested just about a week earlier when I felt it could have been breached. We now know it held for one more round but finally succumbed to the pressure. In the process, the Dow also breached the 38% retracement of the rally which should be very troubling to the bullish cause. Major support is now 12270 which is the April 15 low as well as right near the 61% retracement line. If that is breached we would have almost 100% technical confirmation of a top.
The next area of concern was in the housing sector ($HGX). Two weeks ago it rallied off a triple low which had to hold technically. It did, but only long enough to test near term resistance. I remarked last week we were out of the frying pan but not out of the woods. I needed to see near term resistance breached to have confidence another shoe in the sub prime mess wasn't planning to drop. Since I don't really care much for what economists say and believe charts are our very best economic indicators, that other shoe is still very much in play. What concerns me even more about the housing chart is the excellent bullish setup that was violated last week. On Wednesday it violated an excellent price and time cluster. At Tuesday's close it was sitting at the 61% retracement, 46 hours off the May 9 pivot low and 18 hours off the high. In a good market, that is the kind of setup that leads to blast-off. This is why I also teach not to front run the bars. If excellent clusters fail, it's an indication something different is materializing. Not all pivots are the same. But it is these points of interest or windows in time that are very important bits of new information. That failure led to the larger breach of the triple low which held just the week before.
There was yet another area of concern I had mentioned for the past several weeks that you needed to keep in the back of your mind because it was likely to have a day of reckoning. The BBH was wonderful coming off the January low however it ran into serious trouble at a triple high which ultimately failed on April 10. It wasn't a great sign that the NDX/NASDAQ continued to rally without it but it was a clue there would be a payoff down the road. The payoff came as the latest bounce from May 5-19 could not muster any power at all. It finally failed as it hit it's own 200 hour moving average.
Is there anything bullish to report? In a sign that whatever rally may be left is ultimately weakening, market leader Google finally started pulling back to top the gap left on April 18. In the past month, all of these conditions we've been following have kept us in good stead. Google is now the only one which doesn't have technical damage. It is perfectly normal for a stock like Google to retest the upper end of a very bullish gap breakout. As a matter of course, the fact it hasn't done so sooner is a positive light. But here is where the margin of error expires. The low on Google was 537 and the top of the gap is 525. The 38% retracement line is at 529. We have a line in the sand. It can cross that line as long as it makes an intraday recovery. But if the next day is bearish and we close below that line with any kind of decent bearish candle, we suddenly have a market without leadership.
This is as close as we come to turning out the lights in what has looked like a bear market rally up to this point.
Is there a mitigating factor? Indeed there is if the market would elect that path. We are very close to some important time windows.
Starting with Google, it just completed the 47 day low to low cycle. If it is turning back up, it should do so immediately. If it doesn't, take the hint. The same is true for the SOX which put in an evening star last week and doesn't really look like it is ready to go back up. Give the SOX an extra day. Housing is 53 days off it's March low so that window doesn't kick in until the latter part of the week.
Now for the bigger windows. The Dow is 156 days off the top so we are going to have to see if we have an inversion to start the week which fades in the 161 day window by the end of the week. The NDX closed 141 days off it's high. I don't wish to confuse you with all of these calculations so let's try to streamline this for simplicity sake. The markets universally are 3-4 days away from larger windows and you can see that individual leadership sectors are as well. The NQ finally broke the near term down trend line late Friday. It also has calculations that suggest it is time for bounce attempt. How long this bounce lasts is something we can't know. What we do know is there is an important time window in the second half of this week. If we bounce out of the gate on Tuesday and elevates on poor volume, it is likely this is an inversion bounce that fails into the 161 day window in the Dow and 144 day window in tech. If all the bounce can muster is a day, then we have the opportunity to actually make a more important low later in the week. Our clue will be the behavior we see in the Dow and Google where we have good lines in the sand.
