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Compelling Market to Watch
Not One for Large Commitments

This market has all the earmarks of one in which you could lose a lot of your wealth. It doesn’t feel as if this is a market in which you would be missing any great opportunities by simply sitting on the sidelines and watching the action unfold. The action is compelling; but the short term opportunities, shallow. Practically all worldwide stock markets have lost a significant percentage over the last 2 weeks. While an oversold bounce is likely, the strength and magnitude of the drop so far suggests that something fundamental has changed in the market. If this is the case, then it would not make sense to play this potential rally for a few points to the upside because that upside may not come. This makes today’s market a poor entry point for going short, and a dangerous one for going long. It’s a compelling market to watch; but not one for large commitments.

Some investors have ridden the oil and oil service sector upward and it has risen at a higher rate than the rest of the US stock market over the last couple of years. They are now suffering more than the general market. The fundamental case for oil and oil stocks is strong. What can be a stronger case for oil as, “we’re running out of it”? Yet with oil stocks taking a bigger drubbing than the general market, maybe it is relevant to note that commodities (including oil) tend to drop toward the end of economic cycles. Is it different this time? It may very well be different this time, but when oil and commodities are tracking the stock market almost on a daily basis, something just isn’t right. It’s a compelling market to watch; but not one for large commitments.

After a tremendous bull run, gold and silver are correcting severely. Fundamentally the bull case for the precious metals is strong; yet some basic principles of technical analysis suggest that corrections of this nature probably do not end in just a couple of days. More downside or sideways action is probable. It’s a compelling market to watch; but not one for large commitments.

Trading volume is extremely high, and this is generally a characteristic of changes in market character. According to Yahoo Finance, the NYSE traded 3 billion shares on Wednesday – a huge number which is even greater than trading volumes at the top of the technology bubble.

Of course, one can rationalize that the factors listed above are only relevant to traders because they are long term “investors.” Well if you feel that way, then rationalize this – Dividends on the S&P 500 are significantly less than 2%. With short term interest rates near 5%, your “investment” is totally dependent upon the greater fool standing behind you waiting to pay your price. If you think you are investing, it would be wise to consider whether the greater fool will remain behind you when you need the money from your “investment.” It’s a compelling market to watch; but not one for large commitments.

Today’s Market

The major indices were up today thereby confirming my suspicion that an oversold rally was headed our way. For tonight, I would like to illustrate some key index charts in terms of 2 to 3 year weekly candlestick charts. The first is that of the S&P 500 which shows this week’s action so far as a strong hammer candlestick possibly reversing the two-plus week sharp and painful market drop. The 1250 level seems to have some intermediate term technical significance. The volume during the most recent down weeks was relatively high and significantly higher than the up weeks.

Similar action is seen in the Nasdaq 100 ETF, where 40.3 is a technically significant area. If this week’s volume and bullish price pattern continues, the Nasdaq 100 ETF will probably go back to 40.3, thereby giving bears a low risk entry point for shorting with a fairly tight stop out point. If that top out point is breached, we’ll likely approach the ‘06 highs.

Below is the homebuilder index, a key sector.  The shoulder of a bearish head and shoulders reversal pattern has been broken to the downside. Over the past 4 years or so, this pattern has failed time after time in various stocks and indices. Therefore it will be interesting to see how the index behaves as the index rallies back to the neckline, defined by the two blue lines in the chart below. My guess is that it will fail somewhere between the two blue lines, and this is likely to be a good selling opportunity.

The highly emotionally charged biotechnology index has put out a very bullish candlestick confirmed by high volume. Another good selling opportunity awaits.

Whether or not to play this oversold rally is a matter of personal preference, and aggressiveness. But in my view, this is a compelling market to watch; but not one for large commitments.

Have a great evening.

Martin Goldberg

Copyright © 2006 All rights reserved. Martin F. Goldberg, MS, P.E. Market Analyst Expert Page Commentary Archive Email

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