Gas is now back under $4 in my neck of the woods and probably will be in yours as well before long. Now that the ‘cry uncle’ crisis has gone into temporary slumber, does that mean all is well with the economy again? To be honest, restaurants were packed on Friday night again like the good old days of 2006. I haven’t seen that since this crisis started.
If that’s the case, why is the market going down?
It’s fair to say we’ve reached the critical stage of this bounce. According to part of my methodology which I’ve conveniently adapted from William O’Neil, I also look for a follow through day. In case you don’t know, IBD methodology looks for a follow through day on the 4th-7th day off a bottom. I do things a little different; I look at the rotation of the bars and begin looking at low to low cycles according to the universal principles from the table on page 38 of my book. In order to have a follow through day or bullish rotation, it requires a test of a key retracement level or the actual low itself.
The problem with all of this is how do we know the rally isn’t over? The XLF is the instrument professional traders utilize which represents the banking sector which has been leading the way. On Wednesday it spiked up to the 50 day moving average and backed off. If you were shorting it, that’s the place to do it. Certainly, a fair share of traders did. It’s the correct play and if they went to the well one time too many, that’s the way this game is played.
But the question remains whether we are having the retest which holds that will ultimately propel us higher or will the bear rear its head again this week? Usually, I’d expect a market to drift aimlessly this time of year but I’ve been told by a couple of excellent marketing minds that folks are staying close to home this summer. We might have an interesting August market for a change. You should know there is precedent for market lows in August. Two that come to mind are the big one in 2004 and the temporary one last year. It’s at least feasible we are in the process of putting in a low. But for now my more immediate concern is whether the low established a couple of weeks back is going to hold.
In order to figure this out there are several tests to look at. The first is volume. On the XLF chart we can see declining sell volume since Wednesday. The sell volume is less than buy volume from the week before. This can be misleading because initial buy volume is mostly short covering, in this case historic short covering. Right now there is only one kind of trader in this market. After short covering you have the Johnnie Come Lately group that always comes in too late to buy when others might be taking profits. Those are the people who bought on Tuesday as the banks got close to the 50 day averages. That’s the bad news for the bullish case. The good news that in order for there to be any rally at all, the first order of business is a massive short covering spike. So we are beyond step one. Step two means selling volume has to dry up completely. That means no more selling. That is something we can’t know until the market opens. But the intelligent way to gauge that is to see what happens at support levels. Will buyers come in?
The market does have a shot if for no other reason the chart I showed you last week where the banking sector stopped going down on a key extension point to the last wave up. The last wave up was 72 weeks and the bear has also been 72 weeks. This is the kind of calculation that has kept the Dollar from breaking the low for the past 4 months. But the Dollar extension is based on the last rally phase from 1998-2001 which is three years. In other words, that calculation is based on a monthly scale or one degree larger than what the banks have going right now. But an extension based on 144 weeks or at least 72 down has a reasonable chance of lasting more than 2 weeks.
The next thing to watch is how far banks stocks and the XLF retrace. If they are going to hold, the higher probability has them retracing no more than 61%. News over the weekend is supportive of the extension on the banking chart. Word came out that Congress passed a bill to bail out another round of homeowners which will allow them to refinance as opposed to losing their homes. I look at news events as far as they support my technical calculations and the sentiment for every bounce since last summer has come on the heels of another round of government bailouts. Remember, bear markets ride the slope of hope and hope springs eternal that this will be the magic elixir that rescues financial markets. I think it gives whatever technical bounce started a week ago a chance to take root. But I need to be blunt, that doesn’t mean I think the bear market is over.
Suddenly the problem has become technology. What usually happens during a selling wave is the stocks that have held up the best usually do well once the market turns or even tries to turn. Market leader Google has gone the other way and aside from the biotech stocks, has taken technology with it. The SOX has already made a fresh low. If it turns out the banks do end up leading with tech the follower, this bounce isn’t going to last.
My Webinar to introduce the Greenblatt Time Zone is Wednesday, August 13 at a time to be determined in the next few days but is likely going to be 7:00 PM EST. It’s going to be two hours in duration. We will be teaching the time methodology along with the Greenblatt Time Zone. Those of you who’ve seen other presentations or have the DVD know I’ve spent a lot of time on understanding reversals and working with support/resistance zones. The reason is many people have difficulty with it. We’ll do that plus the new theme is going to be how to recognize when a big move is going to materialize. Details will be available at Traders Library. Those of you who are wondering what happened to my free newsletter, there have been several technical glitches with the new delivery system. I haven’t abandoned it. I plan to launch it again next week.
