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Market Update: Where's the Love?


Tuning out the noise and tuning into the price action allows us to get a much better read on psychology (price) than trying to directly analyze our own market emotions.

The past six weeks have been an interesting ride full of crosscurrents and cautionary tales in the financial markets.

Rewind to the week of September 10. The markets were rocketing higher, yet the AAII bulls vs. bears poll was showing a virtual tie: 36.46 vs. 32.99. Although some probably saw the relatively low number of bulls as a bullish indicator, I saw it as confusing. First and foremost, the markets had just moved 15% higher from the summer lows. Shouldn't this number have read something like 45 or 50% bulls?

To me, uncertainty was seeping in. October was on the horizon, and future prospects of the presidential race and coming "fiscal cliff," were beginning to weigh on the markets. The S&P 500 (INDEXSP:.INX) was working on a short term top that week, and just as important, the Nasdaq 100 (INDEXNASDAQ:NDX) put in its own top the following week (see charts below). Additionally, Mitt Romney caught the markets off guard by clearly winning the first debate; this charged the markets with emotion, but also forced participants to digest the prospect of change. And finally, tech leaders like Apple (NASDAQ:AAPL) and Google (NASDAQ:GOOG) began transitioning from smaller stock price pullbacks to larger corrections.

So here we are today. Many everyday active investors are confused and guessing based on their own sentiment/emotion. And it is in times like these that I find technical analysis to be the most helpful. After all, tuning out the noise and tuning into the price action allows us to get a much better read on psychology (price) than trying to directly analyze our own market emotions. So what are the markets telling us?

Let's turn to the charts. Being that tech has really led the markets lower, let's start there. As I cautioned about a couple weeks back, the Nasdaq 100 has dropped sharply lower out of a head and shoulders topping pattern. It is now coming into the targeted price zone for that pattern, as well as the 200-day moving average. Layer in an RSI of 33 and it appears the index may be nearing a tradable bottom. But I still believe caution is warranted, as the index has more or less stalled at this level and needs to show some follow through to the upside. One possibility may be for a quick washout below the 200-day moving average. If lower, watch the 2600 level.

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No positions in stocks mentioned.

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