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One Foot on the Brakes?

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"Sound judgment, with discernment, is the best of seers." -- Euripides


The Abatement of Excitement

On March 14, 2002 (yes that's correct – 2002) I penned a 'Jo' which discussed a breakout above an 18-month technical resistance downtrend in the S&P 500 (SPX). The following two, March 20, 2002 and March 27, 2002, spoke about an essential need for a conformation of this breakout. And on April 12, 2002 I conveyed a 'Jo' which brought disappointing news to all the Bulls. "Why do I bring this up?" you may ask. The best way to answer that question is with a breif e-mail I received from one of our faithful readers.

Hi Kevin,

I suspect this is NOT the low volume retest as confirmation you were referring to after the break above 1270! Peace, brother. I hope this finds you well.

Deano

The last 'Jo', January 11, 2006, conveyed a similar sentiment as the 3/14/2002 Jo did and stated, "…if this is NOT a head-fake or what is called a Bull Trap, then the probabilities lie with a low volume retest in the near future of the same trendline which was just taken out. This would give us the technical confirmation to suggest the market has entered another bullish cycle." However, much to my dismay, today's 'Jo' is similar to the 4/12/2002 issue in where the abatement of enthusiasm sets precedence. The low volume retest of the Floors & Ceilings technical resistance has been violated with large comparative distribution volume just as a clear Stochastic Divergence set in. Let's take a gander.

Click for larger image

What does all this mean? It means that, along with the two separate secondary indicators discussed and corresponding distribution volume, the probabilities of a new change in trend is much less likely for the time being. In other words, the new road signs are telling us the path remains slippery and to use extreme caution while driving. If over the following weeks the market continues this downtrodden, breaks the 50 DMA and the horizontal support at 1270 – where the market found its initial gusto – we should be looking for the bottom side of this rising wedge formation around 1200.

It is still too early to tell how this will play out, but keep-in-mind the new short-term roads signs are telling the bulls to keep one foot on the breaks.

Until next time:

The KAT

No positions in stocks mentioned.

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