Monday, November 9, 2009

Market Looked Strong Today, but Bearish Signals in Place for Now

Today's rally appears to again be on light volume as you can see from the volume bar registered today, and is in line with the lower volume bars on the entire rally from last week that have failed to break above the 10 day moving average. In regards to short term movements, the past several weeks have often had rallies on declining volume with selloffs on high volume, with the intensity of this trend increasing as of late. Typical behavior resulting from small amounts of folks manipulating the market when no one else is around to move it higher, but the masses come back later and push the market significantly lower, each time in the future will result in stronger selloffs as a result. I'm posting this at 1:20pm PST, so it's possible the volume bar will rise a bit, but not much, and if it does go up significantly I will come back and note it here.

Internals were very strong today and the Dow was on fire making a new daily high on the year, while the S&P recaptured its daily ascending trendline. So the market looks very bullish right now, right? Not quite. Let's bullet-point the bearish indicators we were left with today calling into question how long this rally can really sustain itself:

- only the Dow Industrials made a new daily high today while every other major index, and also the important XLF financial ETF, did not make a new high. With the Russell 2000 and XLF lagging significantly from making a new daily high.

- usually the high risk indices and securities like the Nasdaqs, Russell 2000 and XLF will lead rallies higher, but they are clearly not doing it this time. This action should concern the medium/long term bulls.

- the Dow Tranports index did not confirm the Industrials new high today which gives us a Dow Theory sell signal for the time being.

- the S&P did not break 1101 today which keeps the bearish case alive in the short term

- there was no real news today, and with light volume, it continues to tell us that this is a bear market rally, manipulated by a few people maneuvering the market around. When volume returns, it should be to the downside, and big.

- the US dollar was flat and actually rallied slightly when the Dow broke above 100 points in the positive today. The decline in the dollar is strong, but so far it looks like it's just an ABC decline. It too did not make a new daily extreme today which is another non-confirmation of the Dow's new high.

- the market will be hard pressed to rally high enough to have all the other indices follow to new highs and confirming their rise in the future as many of them are severely lagging this rise so far. Leaving other indices behind on a rally is very bearish if it holds.

- despite the large gains, strong internals, and the S&P recapturing the other side of the daily ascending trend line; it's possible that in a day or two all of that will be reversed which would negate the only bullish action that occurred today. So the reaction to this rally in the coming days is important.

So to sum up, today was a very bullish day for the short term, but we need to see the reaction tomorrow and Wednesday to really tell us if this move is the start of the next rally leg, or just a "fakeout" before a resumption of wave 3 or C.

As I stated earlier, today's strength caused me to protect myself a little if the market continues to rally in the coming weeks before making another top attempt. So I purchased short term December 2009 call options on the SPY and DIA. I purchased very small positions in order to help offset the time erosion that would occur on a continued rally to my long dated Dec 2010/Jan 2011 options.


Anonymous said...

good read,
thks for sharing.

Todd S said...



adan said...

i'd read, in many places by many good authors, that if and when the market needed strong easy moving, it'd be done in the dow; one or two of the 30 stocks with a propensity to do well anyway, with heavy weighting for the index, could literally be pumped to move the whole dow 30 index -

i hadn't paid it much attention; nor that these authors also often said the dow 30 was the perfect set up, cause it was the easiest for people to identify with, plus the easiest to move -

well, now i see what they meant -

on low volume, in a solitary effort, the dow made new highs, and now it's all over the news, and every technician worth his or her salt has to justify a stance, or stand aside -

i just didn't realize the power of this nifty set up of 30 stocks -

my hat, and empty pockets ;-) to the masters of structure....

Todd S said...

Adan, as always I appreciate your insight. I had not heard that angle before on Dow manipulation so thanks for sharing. We'll see how the other indices react to the Dow's new high in the coming days.


Tmac said...

Todd can you please explain why the russell is so important?

Todd S said...

Hi Tom. The Russell is a small cap index so it holds high risk stocks. When traders start to get fearful they tend to dump their high risk assets first. So higher risk indices like the Russell and NASDAQs tend to lead the overall market. Russell has proven over the past several days that it's behavior has been very telling as to what the rest of the market will do, so that's why I've been paying so much attention to it and will continue to do so until another index steps up to foretell future market movement. Normally the NASDAQs lead the way but this time the Russell is doing a better job.