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The Weekly Picture

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Before I began writing this morning, I went back to read the commentary I wrote a week ago. Doing that serves a couple purposes. It reminds me to look for what has changed in my message and also tells us how quickly the emotion and direction of the market can change. Let me take you back to a last Friday:

In my world of market strategy, I underestimated the near-term potential of the market. Over the past week, the major market indices are up roughly 10% and appear to not want to pull back. I would love to be able to say that the "all clear" sirens have been sounded because the military effort is going well, but unfortunately, that isn't my view. Despite the gains, no major trend lines have been breached, the market indices and their components have reached the highest near-term level of overbought levels since the bear market began and the tape is set up for negative divergence one week after making a positive divergence. Basically, I remain skeptical as I have throughout the one-week move that the rally is going to be sustainable because the market has reached near-term overbought levels that suggest an imminent pull back at a time where the bounce hasn't made a higher high.

Clearly I underestimated the near-term potential of the rally, but I don't want to make a second mistake and overestimate the near-term potential now, as my indicators and instinct suggest some level of retrenchment.

OK, now that some level of the retrenchment has taken place, let's look at the current emotion and psychology in the market. Just one short week ago it appeared as if Saddam may have been hit and that "shock and awe" was going to make each Iraqi surrender as soon as they saw a coalition soldier. Many thought the war would be over quickly.

Fast-forward to today's article in the New York Times about how Saddam, alive and well, has sent chemical weapons (you know, like the banned ones he doesn't have) to the front lines. The point isn't that the pendulum has swung too far toward pessimism, but that the war euphoria is quickly being drawn from the market.

Over the past two days I have shown through daily charts that the market is in this trading range, and that once it breaks out of the range, there could be a big move in the direction of the break -- up or down. Today, I want to take a look at the weekly picture again, using our trusty indicators provided by Baseline to see if the intermediate-term picture can help us get an edge.

The Trend

While the S&P 500 (SPX) is in a well-defined trading range on the daily picture, the weekly view continues to show a very well-defined downtrend of lower highs and lower lows. In order to change that trend to even neutral, there would need to be a higher high somewhere above 950. There is potential that the recent low could be a higher low, but to change the trend, breaking a higher high is the key.




The 14-period Stochastic

This was a good indicator for the recent rally. The indicator became extremely oversold and then reversed course and currently stands in the neutral camp. In a downtrend, traders look to sell overbought unless the trend is broken. Given the strength of last week's advance, it is important to watch this indicator as it approaches overbought territory.




The MACD

If the market is able to hold the recent gains, this would have to be considered the "mother of all positive divergences." As you know from past columns, this indicator never got close to levels at any other bear market lows. Frankly, I am not sure whether that is good or bad yet. It is either really really good (positive divergence) or really, really bad (big time bear trap).




The RSI Oscillator

This indicator shows the same as the MACD. It is either very good or very bad.




The daily picture shows a market that could pull back to the lower end of the current trading range. The intermediate-term picture outlines how the market is still in bear mode, but has potentially set up for a positive divergence. I find it hard to believe the positive divergence argument, but clearly the potential should keep one poised to act on a breakout above the upper end of the range (950ish).

Have a great day off Toddo. The only thing you should worry about is how the inmates are running the asylum!
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