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Thursday, Oct 11, '07:
Good evening,
We ended last night's commentary with the following thoughts...
"It's hard to be anything but bullish on the general markets at the moment. However, as we've seen in the case of a couple of the indices looked at tonight, there is reason to believe that a correction is on the horizon. The markets will need to put in a couple of down days before sell signals are in place on the charts.
Without the benefit of foresight, it is hard to avoid a lag of a couple of days when spotting a top or a bottom. That fact aside, looking to stay cautious and ready to take profits on longs at the first sign of trouble is probably the best direction to lean in at the moment."
Could today's mid-afternoon reversal prove to be the introduction to a correction of the rally that has been witnessed since mid-August? Let's see what damage the charts have suffered after today's action.
S&P-500... |
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It wasn't a day characterized by huge price moves on low trading activity; that's for sure. Volumes came in at just above 3 billion today, which is a reasonable amount above that seen on each day over the past 3 weeks.
However, despite the fact that things looked rather ugly at the lows, price has managed to close at the resistance level at 1554, down 0.5%. The highs for the day were (an all-time intraday record of) 1576 and the lows were at 1546, which converts to a range of 30pts (nearly 2%).
A look at the momentum indicators tells us that one out of two initial sell signals are now in place... The rising trendline on RSI has been broken after today's session but MACD has still not managed to pull off a negative MA crossover. If tomorrow were to turn out to be a down day of any consequence, that second signal would also be triggered.
Until that happens though, today's action by itself does not do much damage to the overall trend.
Dow Industrials... |
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The Dow was trading a smidgen below the level of its July-highs, but was able to close at that level. MACD is close to providing a negative MA crossover and so its RSI to breaking its uptrend line. Volumes came in at above average levels on this index as well.
Nasdaq-100... |
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The Nasdaq indices were the ones that we were starting to seriously worry about and, today, those fears were justified. Make no mistake, the day's action on its own has barely dusted the bunnies off the rising minor trend. Regardless, it's quite impressive that the day's candlestick tagged both ends of the bull channel (despite the fact that its a narrow one) that has encompassed price action over the past 6 weeks.
Looking at the overall chart, one cannot read too much into today's action - despite the fact that it was an incredible 4% from highs to lows (and, moreover, in just the space of a couple of hours) - as anything other than a potential blessing for the longer-term health of the bull run. With RSI now at a more healthy 64 (as opposed to 75+ seen over the past few days), some of the overextended conditions have worn off.
The gap in the area between 2105 and 2120 may soon need to be filled but it will take a breaking of potential support at 2050 before the bull trend can be considered to be in serious threat.
That doesn't mean that traders shouldn't remain extremely vigilant. Keeping losses small is as important, if not more than, keeping profits large.
Transports... |
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A couple of days ago, we'd highlighted the need for the resuscitation of the Transports as a crucial factor in the on-going health of the general markets. After meandering just above the recently broken resistance level of 4940, the DJTA fell back under that level today.
RSI is still above its 50-line and MACD above its own centerline, so there is hope. If negative crossovers are seen on those centerlines, this index is in extreme danger of making a significant bearish reversal (you may remember that price is now retesting a broken cyclical bull trend line, a fact that we've highlighted in a recent edition of the weekly commentary).
Utilities... |
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The Utilities were another segment that we'd argued was crucial to the furtherance of the rally in the general markets. Despite having run up nicely over the past 6-8 weeks, UTIL has not had the oomph to break crucial resistance at 521.
In a nutshell, today's action does not break the back of the bull; it may even prove to have been a healthful dose of caution. However, if the next day or two see declines of more than a percentage point or two, we'd look to bail a majority of existing longs, hold existing short positions and stay on the sidelines for a short period before jumping in to too many new trades.
That's at least as far as stock trades go. We might well look to implement a myriad of appropriate options strategies, if the right conditions persist.
Goodnight and keep your wits about things tomorrow!
Asher Pinto |
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