Once again we have a tale of two different markets. The Dow is revisiting the January and March lows once again while the tech leading NDX retests the 38% retracement level. On the surface, this would seem to be a market that should make both bulls and bears satisfied. Mind you, I use the word 'satisfied' because there is no such thing as 'happy' when it comes to the stock market. Nine times out of ten, by the time you get 'happy' in one of your positions, its time to go. However, this constant tug of war only allows the worst of the worst charts to drop while keeping a really good stock like Google from retesting 2007 highs.
On display for the subscriber base is my new 'Greenblatt Time Zone' which was designed for me by GenesisFT. It is still in the test stage but it counts the bars and saves hours of work. The other night I was able to go through every Dow and NDX stock within an hour. I don't just scan charts. I look at timing cycles and see what stands out. Have you ever taken a trip to the industrial side of town where they have all the junkyards? We all have and you know what they look like. Right now, the stock market looks the same way. On any given day a normal market serves up new decent set ups for bulls and bears as well as its share of junk. At this point in time, there seems to be more junk than usual. Here's the verdict: aside from the few market leaders that are on pause and a section of the market that remains in a confirmed downtrend; many charts appear to going no where. There are many charts that are either neutral looking or have tried to go down come to near term support areas and turn back up. But there are more stocks on the 'bearish' side of neutral.
We have a condition like this when you have one section of the market retesting important lows while the true leadership side of the market remains in benign correction mode. We are in a position where the banks are really going to break and if they do tech will finally buckle. If you look at a chart of the $BKX you'll see an ordinary run of the mill bear market correction from 2000-02 followed by a really nice rally. The problem with the banks is that in the past year and a half it has managed to drop approximately 1.618 times the drop from the old bear market. In other words, the banks are at the same level now that they were in when the Fed started the easy money cycle and now there is no more easy money to bail them out. Banking stocks were the beneficiaries of an all out effort to pull out of the last recession, rallied to significant all time highs and have given it all back. It seems like the easy money cycle never happened, but all you have to do is look down your street at the foreclosures and you know we are probably in worse shape than October 2002. How long has the Fed lowered interest rates? It's been almost a year. Perhaps they averted a crash, but certainly it is amazing to look at a BKX that has now given back all the gains from the entire decade including the recovery period from the old bear market. That's why you have a Dow testing vital support areas. This column has remained half bullish because there is no reason to get bearish until tech blows through the 38% retracement level. That area will be tested on Monday.
Friday's action was brutal, no doubt about it. However, I was a little surprised on one account. We have the BKX testing very long term support in the form of the 2002 low. It can eventually break, but one would suspect there should be a better fight before the sector succumbs. I thought we had the potential for a better bounce attempt on Friday. But the BKX did spike down to retest Thursday's low on the open before recovering. The damage was done and the tone was set for the day. But that was a market where the bar has been set very low. Why did tech drop the ball on Friday?
For that answer we turn to the SOX. The SOX retested June lows on Thursday which held but ran into overhead time resistance on Friday morning in the form of the 161 hour window to the May high. It gapped down out of that window and is now back at the June low. As far as the SOX goes, a fresh low for this leg should be anticipated but should go no lower than 369 which is a 61% zone as well as polarity in the form of April support. If that area were to fall, you could probably take most of tech with it. The only ray of sunshine left in tech is the BBH which had no technical damage on Friday, actually put in an inside day to Thursday's gains and hit a low in the 146 (Fibonacci retracement) hour off the May 22 low and closed with a really bullish looking candle.
I think there is still more gas in the bearish tank for the SOX. As you know with the price of gas, it isn't easy to fill up a tank these days. The Dow has slightly more to drop to get to 2008 lows, it should get there. The NDX may overshoot the 38% line here. However, as we look to the put/call ratio, you'll see that we finally got the kind of fear on Friday which could spell the end of this leg down. We are now at the highest levels since March. To me, that doesn't imply we go back into a bull market. Not by a long shot. Remember what I've said in this column over the past month. I think this tug of war and uncertain outcome of the election can keep us locked in this trading range all summer. We are about to find out if that is going to come to pass.
