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A fresh look


As I was driving home last night, I had to wonder if I was overly pessimistic that Wednesday's low could be "the" low for this bear market leg down. When I talk to myself, I can convince myself of anything, especially if it is that I am wrong in my opinion. By the time I got home, I was figuring out how to tell everyone that yesterday was THAT important and indicative of a new run higher. Then I did what I have always learned to do; reevaluate the reasons for my position and then go to the charts.

Was it the beginning of something bigger where the gravy train is already leaving the station? As nice as it feels, I am hard pressed to say that now is the right time to jump into the tape after this type day. As you know by now, I try not to wing these thoughts.

1. The weekly readings did not approach levels preceding prior intermediate-term lows
2. All bear markets have violent countertrend rally days. As a matter of fact, the move into the July '02 low had 4 days of greater than 2% gains and the move into the Oct. '02 low had 2 days greater than 2% gains. The average spike was 2.93%, and the next day was down an average of 0.51%. In each case, the market was down sharply a small number of days after the spike day.
3. The percentage of oversold stocks using a 14-day stochastic in the OEX was 65% Wednesday, well below prior low readings. The number was 54% for the NDX. Prior rallies were preceded by readings in the high 70's or 80's.
4. Traders are no longer lined up short as the market approaches the "pre-announcement" season, the conflict in Iraq, and tax season.
5. Valuations remain neutral at best despite the recent decline.
6. Earnings, while not dropping are also not ramping enough to determine the market as cheap.

If you are buying today, you are saying that Wednesday was THE low point of this drop according to above point 2. As much as I would love to signal the all-clear sound from the intermediate-term standpoint, I can't. The fundamental backdrop has not improved, the intermediate-term technical landscape (Exhibits 1-6) did not reach sufficient washed out readings to indicate an important low has been reached, and if anything, the geo-political environment has become even more uncertain.

After such a drop, the initial move looks so good. The dollar rallied, gold and oil dropped and solid volume drove stocks higher. These are all valid points relative to the action yesterday. I would be careful however to take one day's action and extrapolate that to a new bull market or even an important intermediate-term turn. Gold, oil and the Euro have basically gone up in a straight line and absent new information are undergoing (some more than others) a corrective process to a parabolic (big word for steep move higher) rally. Before wondering if there was a fundamental shift based on one day, it is important to put moves into perspective and Exhibits 7-9 hopefully do that.

Obviously, the market looks a lot higher in the early going. I have been careful not to say investors should sell everything they own. I have simply suggesting that it makes sense to exhibit patience in buying unless we get one or more of the following points addressed (again, it is important to note that I do not come from a short-term trading oriented perspective);
1. Until the intermediate-term indicators get washed out,
2. Corporate America suggests a dramatic improvement in their outlook
3. At least one of the geo-political issues gets resolved,

Exhibit 1 - The weekly SPX using 14-period stochastic.

Exhibit 2 - Weekly SPX with MACD Indicator

Exhibit 3 - Weekly SPX with RSI Indicator

Exhibit 4 - Weekly NAZ with 14-period Stochastic Indicator

Exhibit 5 - Weekly NAZ with MACD

Exhibit 6 - Weekly NAZ with RSI

Exhibit 7 - Weekly Crude Oil

Exhibit 8 - Weekly Gold chart

Exhibit 9 - Weekly chart of Euro vs. Dollar

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As we enter the session, the SPX is up 0.4% for the week.
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