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The
Bullish Argument Isn't Half Bad |
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Well,
while it's too soon bet the farm on it, Friday's market action looks suspiciously
like what we suggested could unfold over the past few weeks.... so far
anyway.
Don't dismiss
Friday's bullish action as luck. If it was luck, there were an awful
lot of coincidences that just happen to lend themselves to the idea of
at least a near-term bounce. Let's roll through each of them one
at a time, in no particular order.
1. Friday
was (almost) an outside day reversal - An outside day simply means
that day's open and close were beyond the high and low of the prior day.
The reversal aspect of such a bar is the result of the change in
direction from one day to the next; Thursday was bearish (close below the
open), while Friday was bullish (close above the open).
But wasn't the
open for the S&P 500 - and all the major indices for that matter
- above the prior day's low on Friday, thus negating the 'outside day-ness'?
Yes and no. Depending on whether you started the day's clock with the pre-open
pricing or the 9:30 am EST opening bell, you may or may not be seen an
outside day on your charts.
Either way though,
the underlying 'reversal' mentality from Friday is undeniable.
 2.
Friday's bounce took shape at a known and proven support line - This
floor is marked in blue on our nearby chart. Though we have indeed traded
under the 1042 area before in recent weeks, thanks to the dip to 1010 back
on July 1st, the 1042 was a rally point twice back in late May and early
June. To see it step up to the plate again for the S&P 500 suggests
the bulls have drawn a line in the sand there.
3. The lower
Bollinger band was (almost) brushed again right before the bleeding stopped
and the healing began - This is another case where we'll have to view
the spirit of the technical indication rather than a perfect technical
event, as the SPX didn't actually touch the lower Bollinger band (gray)
at 1029.
To some degree
you can see the role these band lines have played as support and resistance
points for the broad market lately. If you were able to look further back
on the chart though, you'd see it even more; all the market's major
ebbs and flows since early 2009 have started at or very near a Bollinger
band. So, we'll respect the current apparent bounce at the lower band now.
4. Friday's
buying volume was pretty solid - One of the chief complains about the
July bounce was that not many investors were participating in it.... volume
was low. Then when the market started to pull back in August, all of those
low-volume prognosticators shouted 'aha'. Funny thing though - while the
July rally was a low volume effort, the August pullback was en even
lower-volume dip. So by the same token, the recent selloff also doesn't
indicate a majority opinion.
We make that
point to highlight the fact that Friday's volume was one of the higher
volume days we've seen over the last several weeks, and was the highest
bullish volume day we've seen since late July.
To see that
kind of interest on a Friday of all days is nothing less than amazing;
the bulls weren't playing around.
That said, the
bulls aren't out of the woods yet.
 What's
Working Against Stocks?
Before you go
'all in' on the market, you should know that one day does not make or break
a trend. Perhaps Friday was indeed a fluke, and the bigger trend is still
a bearish one that will ultimately drive the S&P 500 under 1042, and
then lower.
What could
prompt such a move? Of all the potential pitfalls we're facing right
now, the calendar is the biggest one. We're now entering what's
traditionally the weakest period of the year. Whether stocks 'should' lose
value or not is irrelevant - if investors think it's going to happen, they'll
do things to actually make it happen.... a self-fulfilling prophecy.
The other
barrier
is resistance at, well, several moving average lines
as well
as the horizontal ceiling around 1130 (dashed). Unless the SPX can
actually get over those hurdles, then the outside day nor the high volume
buy-in (nor any of the other bullish arguments) won't mean a thing.
Bottom Line
Get the idea?
The media is hysterically bearish right now, but the glimmers of hope started
to show through on Friday. It's clearly not a sure thing yet, but don't
scoff at the bullish possibility either. Remember, the mood was just
as bearish back in late June and early July, yet stocks bounced sharply
then too.
On the flipside,
a move under 1042 or the lower Bollinger band at 1029 is apt to be the
beginning of bigger trouble, now that we're in the problematic time of
year.
The 'right thing
to do' at this point is nothing. That's a tough thing to do when
the media encourages action - any action - after reporting every
shred of news. This is a time to wait though, and let the market figure
things out before you commit. We'll point out the likely move when stocks
have got some real momentum again.
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Updated: 8:15 pm PDT (03:15 GMT), November 2, 2010
