This must be a record for the quickest honeymoon on record. You will recall the market bottomed on Nov. 21 because Obama nominated Geithner to be the new Treasurer (lol). Last week, the country got a case of buyers’ remorse as the announcement of the long awaited plan to rescue banks was greeted like a led balloon. Last week in this space I told you we were on the verge of a breakout or a spectacular failure. Bear markets are a double edged sword. The rallies take you right up to the cusp of turning the corner only to get repelled.
The week started well enough as the NDX set a new price high for the sequence since Nov. 21. But as that materialized on Tuesday, a double high to the day before, not to mention the one on Jan. 6 acted as stiff enough resistance to repel the charts. Here are a few observations. What has developed since November isn’t some reactionary bounce. The markets are genuinely trying to bottom. Whether this is a long term bottom or one that will only last for months is beside the point.
Markets that attempt to come out of recession will do so because buyers and sellers are not unified. Sellers flush themselves out of the system in stages simply because it took them so long to accumulate positions in the old bull market in the first place. Likewise, new accumulation comes in phases after the kind of selling we just lived through. So if there was buying leading up to the January high and some more leading into last week, it certainly isn’t enough to turn the corner. But every time we come up to the line will make it easier to eventually break through. This time the charts had been in their best technical position in months leading up to the event. The only charts that looked really bad were the banks and possibly housing. Yet to look at the HGX you’ll see quite a different kind of mild slope of decline compared to the leg leading into the November low. If the housing sector hasn’t bottomed, it looks like it may be tracing out a slow drip that could eventually turn into an ending diagonal triangle. The housing chart doesn’t look good, but it doesn’t look horrendous either.
That fact might give us a clue into the overall condition of the market. Its true there may not be enough confidence in the new administration’s economic plans yet to be expressed as buying but it also may be true there is an absence of sellers. That will be seen this week as it will be a key time to determine if there is any follow through. People expect markets to go up or down but they can spend a significant amount of time in a sideways trading range. Last week, it was the Dow that started breaking through key trend channels and looked like it was falling into the path of least resistance (down). But as soon as it started dropping on Thursday, the shorts were pulled back. It seemed as if some institutional trader was testing the water to determine whether the market cave in but did not and consequently covered the order.
There are several sections of the market which are trying to go higher. The BBH is still testing the 200-day moving average and refuses to collapse. Perhaps even bigger news is the fact the Shanghai Index has broken above important resistance and is now even trading above important September resistance at 2333. Data as I was writing this had the SSE trading near 2390. That is significant because the next form of resistance is the 200-day moving average near 2500. Across the board, the charts would need work to set up another drop. They just don’t go from good to bad overnight.
But we set ourselves on a path last week and there are still targets slightly lower in the BKX. There is likely a tale of two markets working here with a tug of war between biotech and banking. Banking is likely to win in the short term and I’m still looking for a continued retest of the low in the Dow and BKX that would not be confirmed in tech although the NASDAQ will not be able to advance without the rest of the market.
Getting back to sentiment, markets seem to be telling us the jury is still out as to whether the stimulus plan and banking plan will work. They certainly blew it with all the hype but the truth of the matter is this problem is so complex and so huge that even 10 weeks of preparation are not enough. Everyone is so skittish and impatient and this was apparent from simply turning on any media outlet last week. People are hurting and the public is very angry. They have a right to be angry but perhaps its better they do the right thing then mess up the banking system permanently.
This is a short week and if you are going to be in the New York City area next weekend our long awaited panel discussion takes place at the Marriott Marquis next Sunday at 6 pm. We will be discussing “Technical Analysis in an Event Driven Market.” I’m going to be discussing this topic with Dan Collins and Floyd Upperman. Since I’m going to be on the road next weekend, there will be a very brief column here next week. My normal column resumes the following week when I get back.
