October 26th, 2009

Each Zig or Zag Is Not A Direction Change

If you listen to the “talking heads”, everything sounds like a turning point, a change of direction, a crises, a screaming news story “Extra”. But every zig or zag does not make for a change of direction in the market’s momentum.

Remember how you got swept away like many of the rest of us with euphoria last Monday, October 19, as the market crossed the same level going up as it did a year ago when it cratered along with Lehman, it actually nudged across 1100 intra-day but closed at 1086.48. And now, 5 days later, CNBC stirs the pot by bringing out Doug Cass to announce, again, that he’s shorting. [Interesting, though, Cass has been shorting since August as this SeekingAlpha article of August 30, some 7.5% lower than last Monday’s high, entitled “Doug Kass Goes All In Short“.] A zig last week and a zag today. Even though I’ve been saying the market’s close to a top and today wasn’t pretty if you’re in the market like I am, I don’t believe the momentum trend has yet changed and I don’t believe last Monday will be the high-level market for this rally.

On the Friday before that high, October 17, I wrote “Begin Pruning, Trimming and Weeding Your Portfolio“. I followed that up with two more articles last week about the market sending signals that it’s tired and wants to take a rest. I listen to the market but I don’t believe it says that you have to dump everything overboard just yet.

I’m still hoping the market will shrug off the psychological barrier represented by round numbers like Dow 10000 or S&P 1100 (the Lehman level a year ago) and make a final push through November to the mid- to upper-1100’s. As I’ve described before (see “Ascending Everest: the Mid-Station Rest Camp“, that’s were the real resistance is. In the same way that we didn’t jump all in until the market hurdled some key benchmarks on its way up, there are a number of hurdles that it has to trip over on its way down before we call it quits. On the other hand, we were going to buy after a correction that never came last summer, so we must also be on guard against waiting for a blow-off top that may never come to sell into.

Last week in “More Evidence We’re Approaching a Top“, I pointed to the rolling 12-month returns as an obstacle to moving much higher. Here’s some more evidence that upward momentum is beginning to wane.

If you think back to April and May, we were looking to volume in the form of OBV (On-Balance Volume) as evidence that the bottom had been reached. That indicator is now pointing to a divergence. For the first time since the rally began in March, OBV failed to make a new high as the index inself was making a new high (click on image to enlarge):

It’s not time to jump yet but it is another signal that momentum might be changing direction and that a correction might be coming soon.

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  • Anonymous

    McClellan Oscillator says oversold, due for a rebound…