August 19th, 2009

A Bump But No U-Turn, Yet

Anticipating this mornings dive (see “Difference Between Correction/Consolidation and Reversal” of August 7) doesn’t make it feel any less like getting whiplash. A couple of weeks ago, I wrote:

“Today, the Index bounced up against what could potentially be the top of what we might later understand to be the traders’ remorse correction or consolidation. The market might straddle the 300-day MA like it straddled the 200-day. It could end back at 950 just about the time that a traffic jam is created as the 4 moving averages converge with the neckline. That could be around Labor Day or mid-September and could be a glorious day because it would technically mark the true beginning of the Next Bull Market…..As the bears begin playing their dirges at the death of the bull market, look to see what sort of pattern the Index is making before selling all your stocks, buckling up and reaching for air masks. This plane isn’t going down yet; I hope it won’t land for quite a while.”

Even though the market took a beating in early morning trading, it’s tracking along the 300-day moving average heading towards that 950 convergence around Labor Day. In addition, As uncomfortable as it feels, I’m sticking to that game plan unless and unless it turns out that it breaks below the 950 support level.

But that doesn’t explain or excuse what appears to be “market amnesia”? It was just recently that we were concerned about the value of the $US because of being constantly bombarded with warnings about the damage done by our historic Federal deficits. We were concerned that Foreign countries were going to no longer accept the dollar and the rumor was that China was looking to replace the $US by another reserve currency. There was fear that all the hard commodities like steel, copper and aluminum was being accumulated by China in anticipation of a burgeoning economy?

And now what do we see? Rising $US, renewed fear of deflation, surpluses in natural gas and oil and slowdown in the Chinese economy. When the market behaves as it did Monday morning and today, it’s hard sorting out fact from fiction, reality from fantasy. Things can moderate but they don’t usually make u-turns.

And this morning, to echo the nearly instantaneous change of perception, CNBC brings on Robert Shiller and Doug Kass to further “reframe” the pull-back as the another leg down towards the bottom, ala 1936-7 (the economy was on the mend from the Great Depression until it was hit by another recession). Then they repeat over and over an opinion by Buffett, their idol, that a second stimulus is needed to prevent falling into a W-type recovery. But here’s what it actually looks like:

The 300-day MA has held. Market hasn’t even tested the neckline support. The faster MAs are still rising. Volume trends are still favorable. Finally, we’re not expecting the 300-day MA to turn up until early 2010.

Let’s slow down and take one step at a time. Again, nothing yet has happened anything different than what everyone has been expecting (the “pullback”) ever since May. So far, it is tracing the 300-day moving average, just as anticipated. There’s been no violation of any other indicators. While it’s uncomfortable, it’s not a surprise.

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  • Piazzi

    Guru,

    FWIW, I think the FED has to walk a tight range of USD not breaking down and not running away to the never never land

    same with bonds

    if they can or not is a different matter

    but me thinks there is a concerted desire on the parts of all major Central Banks to keep the dollar in a range and use that range to retire as much debt as possible and transfer as much wealth as possible

    and, No, I am not a conspiracy theorist, I just think a range-bound dollar, and range-bound rates can buy time and time is what they need, even more than money

    again, I am most probably wrong, and even if I am right, they may not fail at some point

    regards,

    piazzi

    markettime.blogspot.com

  • godsdog

    thanks for your blog and the time you spend on it, lots of well-reasoned and practical advice…i make it a point to read it at least once a week…cheers

  • Anonymous

    gold appears to breakout…check out the chart on ngd.

    http://goldstocktrades.wordpress.com/2009/08/19/getting-close-to-a-major-move-in-new-gold-ngd/

    it appears the markets are showing their hands.

  • Anonymous

    I enjoy your blog and chart work, I check your site nearly every workday.

    What are your thoughts now that the S&P jumped past 1010 today? I am thinking we are in for a short term continuation upwards.

    Best Regards

  • Guru

    I was surprised and impressed with today's market action. Having broken above the 1010 resistance area, the road to 100-1150 seems to be clear. I'm committed and have money riding on it so I can hope and stay vigil.