Last week was characterized by a drop on Monday followed by the best sustained action we’ve had since the low. We are on a stretch where tech has put in bullish candles three out of the last four days. If last week was a playoff series, the bulls would be up three games to two. We all know it takes four to win a series. That must mean we need an up day on Monday, right?
Not exactly.
In case you’ve noticed, many of these charts are starting to hit important resistance levels in the form of retracements or moving averages. How they are dealt with will determine the longevity of this move. My initial target for the NDX was about 1940 when the declining 200-day moving average (dma) was there. It’s still a 61% retracement line but we’ve already closed above the 200 by five points. The bulls have done their part, they’ve accomplished beyond the minimum requirements for a trading bounce. The bears had a chance to blow this rally up last Wednesday when the NDX reached the 50 dma but either would not or could not. Now we are at the 200.
So if we pass the 200 does it mean the bear market is over? The answer to that is a simple; not by a long shot. At the 61% retracement, all we’ve done is retrace 61% off the secondary high from May and June. Tech already retraced 61% of the move off the top in May and June and it didn’t prevent other parts of the market from setting new bear market lows. Why am I concerned about other parts of the market? When banking tanks, it has shown the propensity to ruin even the best tech setups, just look at Google. Google had one of the most bullish setups you ever want to see on a chart yet it buckled in the face of the Indy Mac bank failure that led to that last leg down. You must know that everything is related in some way.
If bearish minded traders are well organized, this is the place they’ll be able to take the market down. The big shorts will be waiting at the important moving averages. If they aren’t, there’s no reason for the markets to go down. But I told my subscribers this week that several sectors including the semiconductors were starting to emerge and sectors don’t emerge on tiny spikes off a bottom. My own personal belief coming into last week was a rally could be sustained until Labor Day and this view did not waver on those big down days because we never violated the important support lines I needed to see invalidated. That being said, this two steps forward one step back movement hasn’t given me reason to think this is more than just another bear market rally.
Let’s give this some real perspective. Tech hasn’t taken out the March low and has retraced deeply into the drop from May/June. The SPX has only nudged above the 38% line of the May high and closed the week at the 50 dma. While the NDX/NASDAQ have more than traced out a minimum requirement bear market bounce, the SPX has now done the minimum. The Dow still has trouble getting through polarity in the form of the January/March lows. For all the trouble over the past month, we still are only at first base in determining whether the bear is going to be in rear view mirror. If you noticed, the p/c got down to 0.76 last week, which is the lowest level in months. Should anyone be getting overconfident at this stage of the game?
What bulls need to see this week is disorganization on the part of the bears. Bulls don’t even need to buy to keep this going. What is needed here is an absence of sellers. If sellers come in they can kill the rally. The question is they out there? You should know that cup and handle patterns lead to big waves simply because selling action dries up. For discussion sake, let’s say sellers are not there and one reason could be they are on vacation until Labor Day. Let’s say the NDX can keep going. The NDX can go all the way up to about 2000 without violating the technical case for the bear market. The initial March to June leg was 1668 to 2055 for 387 points. If we multiply that by .618 we get a 239 point move off a low of 1761. At that point we’d have an ABC move of a 5 wave triangle with only smaller D down and E up to follow. I’m not saying that is going to happen but if it did, the SPX can get up to the 61% retracement off May, fail and take tech with it. That would also demonstrate how sneaky a bear market really is. The truth of the matter is if the NDX did get to 2000, chances are sentiment would likely get euphoric and the majority of participants may start thinking the bottom is in. That’s where the trap is sprung. So this week’s chart shows you something that may happen but is in no way a prediction or guarantee. It’s just an intelligent hypothesis given the decent state of many charts at the current moment. The truth is this market is not behaving like something that is about to top and fail just yet. However, I am watching to see what happens at near term resistance. Do we continue with those big 200-300 point down days or will we start forming a base?
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