Friday, November 16, 2007

Trying to Test Recent Lows

It was a great visit to the UK; very impressive to meet with traders there. There's a heightened international awareness among UK traders, I find, which is helpful to big picture thinking. Still, nothing beats the old routine of getting up at 4 AM, settling into the office chair, listening to some stimulating music, and figuring out the themes for the coming trading day.

I've resumed the regular Twitter postings; the last five will appear on the TraderFeed blog, and the entire list is on my Twitter page. There are a number of occasions when I'll see something interesting that may not merit a separate blog post; those are the items I'll pass along via Twitter.

Notice that we've had absolutely no follow through to the Tuesday rally, which supports the notion that the rally was largely short covering feeding on itself. As I noted yesterday, that places us in a range bound situation defined by the Wednesday highs and the Monday lows. How we trade on any test of those lows--the degree of participation among the various sectors, the behavior of those indicators of risk aversion (rates, Yen, financial stocks)--will play a large role in the market's near-term prospects. In the larger picture, nothing so far has altered my primary scenario of a multi-month range bound market defined by the bull highs and the August lows.

Normal expectations would be for some downside follow through to yesterday's weakness and negative momentum. My Demand indicator closed at 28; Supply finished at 116. What that means is that we had about 4 times as many stocks closing below the volatility envelopes surrounding their intermediate-term moving averages. Broad weakness of that kind frequently leads to further weakness in the short run.

Still, even as we approach the recent lows, there are indications of relative strength. On Thursday we had 122 fresh 20-day highs and 794 new lows across the three major US exchanges. That is far fewer new lows that we saw either earlier this week or especially last week. If we just look at NYSE common stocks, we find that Thursday brought 14 new annual highs and 110 52-week lows. That is less than half the level of new lows registered last week. I will be watching these new lows very carefully, as they will tell us a great deal as to whether this market is poised for a more sustained bullish turnaround or is undergoing a fresh round of deterioration.

My measure of Technical Strength, which I highlighted yesterday, deteriorated on Thursday. Among the 40 stocks across the S&P sectors that I track, we have 6 qualifying as technically strong, 5 as neutral, and 29 as weak. So what we're seeing is those neutral stocks fall into the weak category. Before a market gives strong readings from a weak situation, we see an expansion in the number of neutral stocks, so I'll be watching to see how well these neutral issues hold up in today's trading and will pass along any salient observations via Twitter.

I also notice that we had only 27% of S&P 500 issues and 29% of NYSE stocks close above their 50-day moving averages. That's not far from the low figures registered just prior to the Tuesday rally. A move in this indicator to new lows would suggest continued broad weakness. Notice above the excellent chart from Decision Point. We're actually seeing a positive divergence in the number of financial stocks closing above their 50-day moving averages, as the sector index (XLF) has made price lows with fewer component stocks trading below their moving averages. I would be much more bullish on the market turnaround scenario if we can see financial issues holding their recent lows on any tests of index lows.

So, all in all, we're seeing near-term weakness and it wouldn't be at all surprising to see near-term follow through to the downside. If we make fresh lows across the indicators after that Tuesday rally, we have to upgrade the odds of a larger bear market move. If we continue to see a reduction in stocks making new lows, stocks trading below their moving averages, etc., I'd expect a more durable rally to proceed from any tests of recent index lows.

One other thing for the radar: Notice how the jawboning about the dollar seems much more coordinated of late. Same theme out of Europe, Japan, and even the U.S. from Treasury Secretary Paulson. The U.S. doesn't want massive capital outflows (TIC data due to come out in a few hours) and other countries don't want a volatile, weak dollar. I don't know if coordinated jawboning could lead to coordinated intervention in the markets, but my ears are perked when I hear similar messages from different places.

Back to the music. Have a great weekend. I'll update with some links later today.

1 comment:

heywally said...

Jason's (from sentiment trader) research also supports the idea of carry through weakness today (based on looking at the market action around option's expiration but I wonder if people are going to try and get the jump on the turkey rally given we've had two days in a row of weakness already. Can't quantify that. :) At any rate, I took my profit in an overnight ES long and am awaiting (with a minimal longer term NQ position) the traditional sell the gap opening for more info.