Tuesday, August 10, 2010

Danger Zone

August is living up to its choppy nature and heading into September, the worst month of the year. Too soon to think that way? Maybe. But more than one analyst I respect is starting to talk about a nasty fall, and I don't mean Autumn.
They look at voodoo fundamentals but I have to tell you they look pretty rotten even to a technical analyst like me. Anyway, check this chart. We may cheer the intraday recoveries in two of the past three days but in Japanese candlestick parlance, the appeared after a decent rally and are labeled as "hanging man" candles. The name is ominous for a reason as they represent possible ends to the trend.

Of course, they need confirmation and that, by definition, means we cannot use them to pick the top. But there comes a point when the market will run out of shrugging power. How much longer can it shrug of all the bad news - including today's bailout of the states - before the bears win?

Sure, resilience in the face of bad news is bullish but it should manifest in a rally sooner rather than later. It is time to get off the pot, if you know what I mean, and start moving higher. The longer it stays here the worse it looks.

6 comments:

William said...

The technicals really started taken a turn for the worse the last week or so and have continued to deteriorate. The McClellan oscillator is coming off the most overbought since late '08 - early '09, which led to the Dow losing 2,500 points in two months.

Bearish divergences in momentum indicators, declining volume, and deteriorating breadth are not indicative of a continuing trend.

The commitment of traders has show the retail trader is now piling at the top again, while the smart money went from net long to net short as of a week ago.

CNBC has had the several recent articles of analysts one upping each other with bullish calls; the most recent calling for Dow 14,000 by the end of next year, despite the clear stalling of the economy.
Cramer said we have seen the lows for the year. A clear sign that the lows will be taken out.

There is a very clear pennant forming in the major averages, a continuation pattern that typically resolves to the down side. This might also be the right shoulder of a complex head and shoulders pattern.

The dollar and the vix are starting to show signs of bottoming. Treasury yields continue dropping like a stone. All's well? Bond traders think otherwise and have a much better record at turns than kool-aid pounding, cramer following, CNBC watching "investor."

So we have an extreme overbought condition, a bullishly complacent market, vix showing signs of bottoming, a dollar showing signs that another round of deflationary pressure is on the way, a bond market that is clearly not agreeing with the stock market, deteriorating breadth and volume, lagging momentum, and a text book bearish pattern. Danger zone indeed.

Quick Takes Pro said...

Another cogent response - thank you.

Please read the post on TheStreet and see that no matter what Mr. Cramer says I remain a huge admirer. Not a follower - an admirer.

William said...

He's successful, that's for sure. He's worked his way up to a position where he opines on the market, takes zero risk, and still earns a boat load. Sign me up lol.

MrWave4 said...

I am not too keen on the "Hanging Man" candlestick pattern on the DJI as a potential top reversal as the long lower shadow (rejecting lower prices) is bullish. I would wait for some confirmation.

From a candle perspective the Bear harami & smaller bodies we have seen are signaling a slowdown in momentum.

Like William I too see many technical signs that the market could turn from here:

1. The failure by the S&P,RUT,NDX to make a new high like the DJI

2. Breadth & volume fell during the current rally

3. DJI & S&P showing a classic wedge shaped rise

MrWave4 said...

Didnt have to wait long for the confirmation for the hanging man!

Quick Takes Pro said...

I mentioned confirmation in the post. Yes, the buyers came back intraday but confirmation tells us that the market rejected them.