Sunday, August 12, 2007

Looking For a Tell

Confusion reigns supreme, but what kind of footprints is the market leaving behind?

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I've been reading various websites, and there are definitely mixed messages as to the state of the markets right now. On the one hand, sellers are definitely in control of the market. We have seen 3 BSC (Bear Stearns) Hedge funds have collapse, three funds from BNP Paribas are halting redemptions, and rumours are swirling about that some GS (Goldman Sachs) hedge funds are also in trouble. Whether those rumours are true are not does not matter at all, it's the perception of fear created by these rumours that matters at this juncture. Many stocks are just one shoe drop away from a visit to their respective 52-week lows.

On the other hand, the selling has been overdone as indicated by the BPSPX closing @47.5 on the weekly, which is a level not seen since the July correction of last year (or was that already a distant memory?). And the SPXA50 (very similar to the T2108 indicator) seems to be trying to grind out a bottom here.
And then I see this interesting picture of divergence:

The important visual clue that I get from looking at the above picture is how the Russell 2000 Index has put in 5 consecutive higher highs against all the other major indices (S&P500, Dow Jones Industrial Average, and the Nasdaq100). In other words, the small caps led the blue chips (DIA), the techs (QQQQ), and the overall market (SPY) in the past week, a week characterized by one massively bearish day sandwiched in between 4 constructively winning sessions. The other interesting note is the fact that the Russell 2000 did not participate in Thursday's carnage, and on Friday, more than fully recovered to close in the upper half of its trading range for that week. I don't believe that 2000 stocks being bidded up for 5 consecutive sessions is a fluke random occurrence.

That said however, given that I've written about the folly of calling Market Bottoms, I guess I shouldn't contradict myself by calling for a market bottom here. However, what I will do is look for signs of buyers stepping up to the plate to support this market.

As first initially noted by Dr. Brett, ES has a congestion zone of 1465-1475. This zone has been touched in 11 of the past 12 market sessions.

The resistance zone remains the same as previously mentioned, with the possible addition that I would update it to be 1495 - 1505 on the ES futures.

The support zone is now 1435-1445 for the ES. Break this and we will make a visit to 1420. Surprisingly enough, even a drop down to this level still does not violate the current bull market - we would have to drop below 1400 to officially enter a correction market.

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