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The
Bulls Try to Take the Reigns, But For How Long? |
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It
looks like investors want to be bulls here - it really does.
In five of the last six sessions, the buyers stepped up to the plate in
the middle of the day to avert what would have been sizeable losses.
Unfortunately, those same buyers couldn't stave off Tuesday's slaughter,
which is the only reason we took a loss last week. Still, one has to acknowledge
getting
slaughtered once a week is enough to drag the market down.
The upside to
last week is straightforward - the market's mini-consolidation created
some lines in the sand which we can now use as make-or-break (bullish or
bearish) points.
We're using
the S&P 500 index as our market proxy, but every single index chart
has taken on the same shape ... horizontal support lines, and falling
resistance lines.
 For
the S&P 500, Tuesday's low of 804 also happened to be the low
for the week, matched on Wednesday, and almost matched on Friday
before the rebound to the close of 831.95.
That 804 line
is significant not because it's the ultimate low we've made during this
bear market, but because that was the area (800 to 805) that tried to hold
up as support immediately before and after making the late-November
low of 741. (Though that dip was painful, we only traded under 800 for
two days, and the second of those days was a recovery effort.) Point
being, the 800-ish area needs to hold the index up. Otherwise, a
tumble under it could cause worrisome flashbacks of November 20th.
On the flipside,
despite seeing three higher highs during the first three trading days of
the year, ten of the following twelve days showed us lower highs and/or
lower lows. The bulls need to snap that pattern before even thinking
about
a significant rally effort.
It's worth noting
though last week was a net loser, a visual inspection of the chart clearly
indicates the pace of losses taken in the second week of the year
were much more drastic than the ones taken over the last six trading
days. So, the shift in momentum truly could have happened this past
week. We won't know for sure until the coming week, when/if higher
highs are made. A lot of the foundation has been laid though.
Bottom line:
Watch
support at the 800 level, or watch for higher highs early next week - those
should be your early warnings of whatever move the market decides to make.
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But
What About Longevity? |
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One detail we
want to add this week to our chart analysis - breadth and depth.
Several false
starts and sudden reversals over the last few weeks have made it pretty
clear you can't trade the market's 'apparent' momentum. Why? Because
that momentum fatigues too quickly, and too easily ... a very frustrating
situation.
What may have
been missing from any of those trends - whether bullish or bearish
- was breadth and depth.
Breadth indicates
how many stocks for a given stock exchange are advancing, compared to how
many are declining. Depth compares the volume of those advancers to the
volume of any decliners. Both, together and separately, indicate
the true health of any trend. And, as you now know from recent experience,
many of the recent false starts were just hollow (i.e. unsustainable) rallies
or breakdowns, largely because they lacked this breadth and depth.
 So
did things change last week? Take a look.
To help us turn
the day-to-day data (which is pretty erratic) into something a little more
useful (like a trend-spotting hint), we've plotted moving averages
of the NYSE's bullish and bearish breadth, and bullish and bearish depth.
The moving averages of bearish data are red, while the moving averages
of bullish data are green. (Hope you aren't color blind.)
The idea is
simple - if a rally is for real, the bullish breadth and depth moving
average lines should be pointed higher, while the bearish breadth and depth
moving averages should be pointed lower.
To make things
even a little easier to compare, we've overlaid both breadth moving averages,
one on top of the other. We did the same with both depth moving averages.
And, to avoid any confusion, we're not even showing the actual daily data
... it's not part of our analysis anyway. We're just showing the moving
averages.
And the results?
Most of the ebbs and flows look as they should... except for one.
Take a look
at the bullish 'depth' moving average from early December up until last
week. Despite the fact that the market was rising, bullish volume was
actually falling. In other words, it was a hollow rally, and
a large part of the reason for a bearish January.
Ironically,
depth - volume - looks more bullish after last week than it has
since early December.
Though this
chart doesn't quite yet look the way the bulls want it to, it's getting
close. We'll update this chart in future blogs and newsletters, so stay
tuned.
A couple of
weeks ago when we were watching China
Energy Recovery (OTCBB: CGYV) make a strong break to - and past
-
the $2.00 mark, our celebration was also coupled with concern about sustainability.
In short, following a move of that size, the risk of a pullback was
higher than average.
 Sure
enough, CGYV did pull back, all the way to a low of $1.65 on Friday.
Shares closed at $1.80.
So is that good,
or bad?
We ultimately
believe that's a good thing, particularly if you were looking to
step into a position but didn't want to buy at what was possibly a short-term
top. Here's your chance to get in at the same level where many others
were
accumulating the stock in late December and early January.
The fact is,
the rally on the 14th may have been a case of "buy first, ask questions
later". We have no problem with that kind of euphoria-inspired buying,
as long as it's someone else doing the buying. The problem with
euphoria-inspired buying is that once the euphoria wears off, so
does the buying.
Nevertheless,
these short-term buyers do play a role for longer-term investors
... they can draw attention to a stock, and break it out of a rut. Despite
CGYV's pullback since then, the one-day-wonder rally at least did us
that favor.
Don't get us
wrong - there's nothing we'd like more than for one of our stock picks
to simply keep going up, up, and up. And in a strong bull market,
that may actually happen. However, to ignore the environment we're in (which
is shaky, at best) and ignore the way stocks are trading right now
(two steps forward and one step back, at best) would be crazy. The
high-odds trades have generally been to accept what the market is giving
you, and to not ask for something the market can't give you ... which is
long-term, sustained rallies.
In another time
and scenario we might feel differently. But, these pullbacks have become
the norm, and fairly predictable. More important, these pullbacks
are advantageous buying opportunities.
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Updated: 8:15 pm PDT (03:15 GMT), November 2, 2010
