Friday, April 14, 2005
The last three weeks have seen plenty of action, with both bulls and bears trying to influence the market. The bears have the upper hand, though, because the market has been unable to break through overhead resistance. Most of the major indices challenged that overhead resistance, and also nearly bumped up against their 50-day moving averages. But they were unable to break through, so we are now declining quite seriously once again. If the market should close below the January-March lows, that would be another bearish sign.
This past week saw one of the most ridiculous, "fluff" rallies in memory. After declining for a couple of days, but not really being that oversold, the market was declining again on Tuesday. However, the minutes of the Fed Open Market Committee's March meeting were released. That "old" news spurred a furious rally that took the market all the way back to the resistance area (1190 on $SPX, for example).
The reason we call it a "fluff" rally is that it was not based on technicals (such as an oversold condition) nor on hard fundamentals (such as a Government data report). Rather it was news-based -- and old news at that! Those who bought that rally got what they deserved, though, as it was quickly gone in wave after wave of selling on Wednesday and Thursday.
Let's look at the technical indicators. Equity-only put-call ratios are not as bearish as one might think. They had stopped rising and were trying to roll over and head down, which would have been a buy signal. You can see from the above charts, though, that they have now made new highs, thus once again confirming their sell signal status.
Market breadth has been erratic. But the bigger picture here is that breadth is not as oversold now as it was at the March bottom. That is a positive divergence, and it is a bullish indicator of sorts. We probably need to see another oversold buy signal line up before we can officially grade them as bullish. Volatility ($VIX) has been erratic as well. During Tuesday's "fluff" rally, $VIX nearly fell to 11 -- the lowest it's been in quite a while. However, the ensuing decline saw $VIX jump over two points higher in one day! So $VIX appears to be in a rather erratic trading range. If it should close above 14.50, however, that would be bearish. In summary, we think price action is the most important indicator as it has been able to keep us short, despite various (false) bullish readings from the other technical indicators. We will likely remain bearish unless the major indices can close above their 50-day moving averages, or unless we get a uniformity of confirmed buy signals from our indicators (most likely at lower levels)..
About Larry McMillan
