Sunday, May 25, 2008

Weekend Market Review, May 25

"Even if the economy were to weaken somewhat further, we should be inclined to resist expected, reflexive calls to trot out the hammer again."
- Kevin Warsh, Federal Reserve Governor, Sun. May 25/08

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In this latest market rally that started in mid-Apr, each selloff attempt had no follow through, and was eventually met with buy the dippers. So what made the selloff on May 19 so different and special? At first glance, not much.
At first I was going to point to the BPSPX rolling over as a reliable sign of a top, but it also rolled over in the first week of May, and that was not the top.
It is only in retrospect that I saw the following signs of the top:
- BPSPX broke below, and closed below its 20d EMA
- SPXA50 broke below, and closed below its 20d EMA
- There was a Trader Vic's 2B top pattern. The first selloff attempt at the beginning of May identified resistance @142.4 - 142.5. Market broke above this resistance level last week just enough to flush out some buy stops. Then the close below 142.4 on Tuesday was confirmation of this reversal pattern. BPSPX was high enough at that point to improve the odds of this reversal pattern being a tradeable top. Had I been aware of these two key tidbits of information, I would have went short near the close on Tuesday.

Note also that the banks and brokers did not participate in the market's attempt to break above previous resistance, another telling sign.
All of my tells have broken their 20d EMA trendline, confirming that the rally is over. However, since the market is now oversold, and the banking index has neared a support level, I'm not sure how much more downside there is. So, the scenarios that I am looking for, for this coming week, is a toss up between further continuation of selling, or a possible dead cat bounce.


XLE had a nice base and break pattern to the upside, and is only beginning to re-test that breakout level, so there is no technical reason to go short yet. However, Short term uptrend is starting to roll over, so a tradeable short could develop if any re-test of potential resistance @91 fails.

Even though I haven't traded any gold stocks, the above chart is interesting nonetheless for a couple of reasons:
- GDX broke a 2month downtrend
- GDX stayed above its 50d EMA for the duration of the market selloff this past week.
- 200d SMA is still trending up.
- All three trendlines (short, intermediate, and longterm trendlines) are converging at the 46.5 - 47.5 area.
Probably one key factor to watch here is for any further signs of weakness in the USD$.

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