What A Difference a Week Makes

By Phil Erlanger  MAY 19, 2006 3:29 PM

TGIF

 




What a difference a week makes:

There is quite a hubbub about the fact that the NASDAQ is down 8 days in a row. Indeed that string beats any seen since 1994. Even the NASDAQ fall from grace that started in 2000 did not see such a string of declines. Is Armageddon therefore right around the corner?

The NASDAQ is on significant support right now. In fact, in the weekly chart above, the NASDAQ is testing an ascending triangle breakout that occurred last year (see blue line in chart above.)  Secondly, we believe relentless strings such as the current one tend to end trends: 



In the above chart are circled 2 long strings of same direction closes. We are currently in a string of 8 down closes. Just last January a string of 7 up closes occurred. That string of up closes ended the advance for the NASDAQ and was coincident with a low choppiness reading of 28. The current choppiness reading is 29, indicating the current downtrend is long in the tooth.

The S&P 100 based EBB indicator relates the momentum of the VIX to the momentum of the market. Just a week ago we complained that the EBB had failed to reach any extreme this year:



In the above chart are circled two lengthy strings of down direction closes. The daily EBB is at the lowest level in years. Fear now abounds. If the market has not reached an intermediate low, it is likely to have achieved a short-term low. Some upside testing is likely going forward.

Our expectations for the market have been muted for this year. At best we expect the market to wind up the year essentially where it began. Tempest-in-a-teapot up-and-down streaks will occur, but our assessment that the market is entrenched in a long-term secular bear market remains. The inability of the market to appreciably gain ground relative to the highs of this decade is exactly the action expected of a secular bear. Indeed, we may have seen the highs of the year already. That said, we expect the market to try and test those highs into mid-July.

We were waiting for a dip to do selective buying. We also admit to large lumps in our throats. That’s probably a very good sign. Fresh short data comes out after the close today. Stay tuned. 

No positions in stocks mentioned.

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