Wednesday, July 09, 2008

Giddy up! Shorts take profits; buyers fishing

Given the extent of the declines I would be surprised if we saw a "V"-reversal from here, but a small handle which held the bulk of yesterday's gains would be very bullish indeed (or a small rise - then a handle). Shorts were likely responsible for most of the buying/covering action. Large one day gains like Tuesdays' after an extensive decline, the Russell 2000 is a good example, is more bearish than bullish.

However, Tuesdays' action is a good start, defining the lows as a basis for a bottom on which future risk can be calculated. Tuesday's lows are now a buying point for sideline money waiting to get in. Shorts will be wary of entering a new positions unless there is a decisive break of its low. Together there is a psychological advantage for bulls. The Russell 2000 fell just shy of a bearish "Three Line Strike", but the suggestion is there.


On the positive side, note the resemblance of the March bottom to the one developing now. The eventual outcome will likely differ in appearance, but there is reason for optimism on using Monday's lows as a support level.

Bullish Percents tell their own story. The Dow looks best placed of the averages to bounce:

With the best strength in Tech (another good sector marker for a bottom):


The one area which has the bottom somewhat on hold is the relatively placid VXN. This level of complacency suggests market participants are expecting a bottom because the market is so oversold. But one only has to look at 1998 to see when oversold market conditions did not lead to a bottom:


Resources: Psychology of a market bottom without fear.



Dr. Declan Fallon, Senior Market Technician, Zignals.com the free stock alerts, market alerts and stock charts website
 
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