Friday, May 20, 2011

Preponderance of evidence

I'd say the stock market is tired and telling us it has had enough of the bull. My thoughts:

I often use the analogy of the civil trial lawyer when talking about how a chartist decides the right action to take. Unless the entire judge and jury was at the scene of the crime as it was happening there is no way anyone can be 100% certain of what happened. So, the prosecution digs for all sorts of evidence including witnesses, forensics, motive, opportunity to commit the crime and anything circumstantial to paint a picture that is consistent with the crime being committed by the defendant.

In charting, we look at trend, momentum, price structure, volume, sentiment, sector considerations and intermarket conditions.  The idea is to run through your desired list of items and indicators and see how many fall on the bullish side of the ledger as well as how many are bearish or of no real help. Some seem to be fundamental but I'll give them a technical spin.

Bullish:

The trend remains up.

The Fed says it will not sell its bonds but just stop buying them after QE2. That means supply is not going to balloon and liquidity should remain strong enough to keep the market resilient

Corporate profits and a weak dollar may be all fundamental but it keeps money flowing into the stock market and that is technical.

Bearish

Weekly reversal bars on major indices
Breakdowns and successful tests in several major indices.
Waning momentum
Rash of bond financing by companies with cash already on hand (remember the cry for corporations to deploy their cash to help the economy?)
Lots of IPOs (does not happen at bottoms)
Emerging markets lagging
Tech and financials lagging while defensive sectors leading

There are more. If you were the judge, how would you rule?

6 comments:

TARGET 5 said...

Nice presentation of the situation. I vote for the bear for the next 2-3 months. After that, we have to wait.

Gabriel said...

I'm a bear but I'm pretty sure the blind bulls will make the inverse H&S work on SPX and COMPQ.

mrgrape said...

So far the inverse H+S pattern has failed, Bonds are looking very strong and same with defensive sectors...
A lot of volatility, If I had to put my money I would say the BEAR comes out.

Jim said...

Not Guilty by reason of insanity. QE to reflate stock market may work, but will not create jobs. Market is on borrowed time. Suckers game, always has been.

Gabriel said...

SPX is sitting on inverse H&S support. The line is semi angled downards. I'm not going to argue grapeman, I'm just saying... the pattern is still in play. To come out and say the bear is here from a technical stance is reckless. There aren't any confirmations that the bear is here (but I am a bear and have been for about a year now).

Jim- I hate to tell you but markets climb a wall of worry. This is a technical message board, not a place to gripe about inflation and the likes. If you are a technician then the headlines do not mean a thing. The only thing that matters is price and that's my big gripe with technicians. I remember one book I read where the guy was a guru with charts and he just locked himself in a room so he could study his charts without being influenced by the news.

Quick Takes Pro said...

The evidence points to the bear case but as y'all said (more or less) there as been no breakdown in price.