Saturday, March 08, 2008 weekly review

Another sour end to the week. What had the Stockcharters to say about it.

Joe Reed has his summary and has a few new charts available on his public list.

Reed's Euro-Dollar chart is good:

The S&P Retail index is fighting to hold key Fibonacci support:

Can the S&P repeat the double bottom a la 2006? Biggest difference is the cyclical bull market of 2006 compared to the cyclical bear market of 2008.

The Nasdaq looks to have confirmed a break of the 2004-2007 rising channel:

Ted Burge shows strong resistance for the QQQQ on the 30-min chart at $42.18.

Ted shows daily support for the Nasdaq at 2,164 and resistance at 2,240:

While the Semiconductor HOLDrs (SMH) is in a well defined sideways pattern:

Maurice Walker gave another lengthy review of the week's action:

Draw Poker is a game of chance. The luck of the draw is sometimes needed in order to get a winning hand. But other times the deck is stacked against you. The odds against filling an inside straight are 12 to 1. So a poker player isn't very wise to make the draw. Unless of course he' s feeling extremely lucky and the pot is at least 12 times the size of his bet.

The market raised the stakes for those betting against its downturn last week, as the wager in the game has proven most costly for the longs. The longs would have been wise not to make the draw, given the recent breakdown of the S&P 500's rising trendline. But they got a signal to fold their hands, based on 3 bearish technical events that occurred on the S&P 500's weekly chart last week (9th chart below). The Descending Triangle pattern broke to the downside below 1310, the 2005 rising trend was violated, and the MACD histogram got a lower bar, changing the slope to the downside.

The market is quickly approaching price levels at which most of us would classify as a bear market. An academic definition of a bear market would be a decline in excess of 20 percent below the October closing high on the S&P 500, which was 1565. So confirmation of a bear market in regards to a percentage definition would be a decline of 313 points, with a move below 1252.

I continue to believe that we are in the 5th leg down in our Elliot wave count. The 5th wave is likely to move below the 1270 January low. The only way that it will stay above 1270 is if we get a truncated fifth. That means that the 5-subwaves in the 5th wave will be contained above the trough on wave 3 (the January 1270 low). This occurs when a Double Bottom pattern forms. Now I have no idea if that will occur given our recent technical break down.

The daily S&P 500 chart backtested the breakdown of its recent Symmetrical Triangle pattern and then broke support at 1310 producing a lower high and a lower low. A Double Bottom pattern is still a possibility.

A case for the bulls:

But there are two schools of thought, in reference to a bear market going forward. The first is that there are more shoes to drop that are not priced into the market, which will have detrimental economic repercussions. The second is that an economic slowdown has already been priced into the market. I am in the latter school. Economists' tell us that the market discounts economic data 6 to 8 months going forward. So the first two quarters of GDP for 2008, which are estimated to be on the soft side, may already be factored into the market even as we speak. The market is always a bet on the future. Another case for the bulls, is that the S&P 500's forward P/E ratio is very attractive at 13.49.

The economy:

Additionally, in regards to the so called inflation and recession threats, due to high oil prices which are now over 100 dollars a barrel. Well a significant gap of positive yield curve has opened up between the 30-year treasury bond and the 3-month t-bill, which suggests that there will be no recession. The yield on the 30-Y bond is at 4.55, while the yield on the 3-month t-bill is 1.45 %. Having a positive yield slope of over 3 percentage points. If bond investors were worried about inflation increasing or the treat of stagflation, they would not be pricing 30-year treasuries to yield 4.55 percent. That is approximately the rate at which headline inflation is at, which is 4.3% according to the CPI data.

The non farm payrolls showed a loss of -63 K jobs in February, with January's revision adding an additional loss of - 5 K jobs. Bring the combined total to -68 K. However, the unemployment rate remained unchanged at 4.8 %. Unemployment still remains relatively low.

The Aroon: a case for the bears:

The Aroon is a trend based indicator that is plotted horizontally on a verticle scale from 0 to 100. There is an Aroon up line and an Aroon down line. When the Aroon down line (bearish indicator) moves above the value of 70 it signals a strong down trend, while the Aroon up (bullish indicator) has a movement below 30, then the trend is bearish. And that is what occurred this week on the daily S&P 500 chart (2nd chart down). Six trading sessions ago, the Aroon down crossed above the Aroon up (a bearish signal), but it remain below the value of 70.

Last Tuesday The Aroon moved above the value of 70 to 100, just 2 days after the minor trend was violated (1st chart down). The Aroon is signaling a strong downtrend at this time. Which suggests that we are now in the next leg down currently in Elliott Wave 5.

Since the October highs we have had 3 sell signals, 1 buy signal, and 1 false buy signal given by the Aroon. The 2 buy signals were giving each time that the market was in a contra-trend. In both December and February, minor trends developed only to quickly violated as the prior trend reasserted itself. Ironically the Aroon flashed a sell signal immediately after the minor trends busted.

The Aroon Oscillator works well with the Aroon. When the Oscillator moves above +50 it indicates the early stages of a new trend. When it hovers near the zero line, prices are trendless. If the oscillator breaks below the value of -50, it signals that a bearish trend is developing. Notice each rally attempt failed to move above the value of +50. Right now the Aroon Oscillator is below the value of - 50 at -96.

The VIX continues to have a bullish MACD, but found resistance today at 30 on the price chart. The P-p-P histogram pattern on VIX has forecasted stock market events correctly as volatility continues to be on the rise (last chart on page 1).

Short-term traders:

Thursday short-term traders got further confirmation of the recent bearish BOSO (buying overbought / selling oversold) sell signal on the S&P 500's 60 minute chart (5th chart down). The first BOSO sell signal was given last Friday, February 29th, as prices plunged through the rising trendline causing the Stochastic to become newly oversold. BOSO buy/sell signals are more appealing when they are accompanied by a break down in the current minor trend. This allows a trader to take advantage of the current weakness in price. The breakdown also coincided with a bearish triple cross of the 10-, 20-, and 50-period EMAs. You also may recall, that February 29th was also the day that bearish Evening Star candlestick pattern was confirmed and the Histogram's bearish m-M-m sell signal occurred on the daily chart.

The 60 minute chart now has positive divergence on the its histogram. So we want to watch to see if the next recovery attempt puts in a larger or smaller histogram. A smaller histogram will bring about more price erosion, while a larger histogram infers prices have further upside for the short term.

Lastly, the Transports now have Broadening Formation; Right Angled and Descending (chart directly above), which could be a continuation pattern of the previous trend. Bulkowski's data gives the pattern almost 50/50 odds.

So in this poker game that we find ourselves in, we might do well to heed the words of singer Kenny Rogers from his song the Gambler, 'You got to know when to hold 'em, know when to fold 'em,
Know when to walk away and know when to run.'

Maurice's chart include his thoughts on the fifth wave down:

With the Aroon analysis based on this chart:

Richard Lehman gave his opinions on the trend channels and has some short term optimism:

3/7 -- Well, the news is about as bad as it gets, but lo and behold, I see us potentially rallying here for a bit. The Naz made a picture perfect touch of its lower channel line and bounced. Others came close. The Naz and QQQQ both set new intraday lows from the October decline. Yes, the news is lousy and the problems aren't going away anytime soon, but a little countertrend bounce may be in the works short term.

3/6 -- The new short term uptrends are already history as we head into another ST decline. The good news is that we're seeing the kind of capitulation one would want to see in a Wave 5 decline and we're getting close to setting new lows. The small caps are toast and the Naz is almost ready to double bottom on the January low. Unfortunately, that's what we need here -- a new low to complete Wave 5 and enable a much more material countertrend rally. Keep your powder dry until then.

3/5 -- Beginnings of the new short term uptrends are now drawn. Let's see what they can do in the next few days.

3/4 -- Looks like the completion of this 5-day ST decline. That's great for a trade but we're nowhere near finished yet in the bigger picture. We have not seen new lows yet on the larger move down and VIX hasn't spiked high enough for a bottom. Check out the SPX hourly and the XLE for precision line touches on the bounce today and enjoy the bounce.

3/2 -- Short term says this latest downchannel may have seen its worst, but that such a narrow channel says there is a larger picture (downward)we will ultimately see. The longer terms have plenty more downside (at least to new lows), but we are not likely to get there without a whole lot of bouncing and zig-zagging first.

Energy Bulls will want to keep their eye on Jack Chan's charts; a sell signal in the Energy Select Sector SPDR (XLE):

Yong Pan has a detailed summary of the week's action across various markets:

And sees Friday's doji in the S&P as a continuation signal:

With distribution firmly in control:

However, does Robert New see Friday's losses as a trend break? Apparently not:

Overall, it was hard to find anyone with a positive bent on the market. How will this play next week?