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Still Chillin'


The market is set to open higher this morning on the back of a HUGE capture of the "thing" suspected of masterminding the September 11th terrorist attacks. In addition, the "no" vote to allow US troops to base in Turkey has thrown another wrench in the effort to bring Saddam to his knees and pushes out the timetable on a military move to rid the world of the current Iraqi villain. Throw in a couple of upgrades and you get a positive early tone. The market has all the appearance of wanting to move higher because it is "holding up" given the news backdrop. Nothing has changed fundamentally and the geo-political front has become more confusing given Turkey's move so it is again important to defer to the intermediate-term picture. In a news driven tape, it is impossible to consistently call each wiggle, but when placing each wiggle in the overall jiggle, we might get a little better framework of where the market stands.

The key question remains whether the recent bounce is the beginning of a more sustainable move to the upside or whether it is another wiggle in the current downtrend. Toward the end of last week we talked about the mixed near-term picture and I would now like to get into the mixed intermediate-term picture. Rather than drone on to fill space - lets get right to it.

Exhibit 1 - The S&P 500 seems like it has been all over the place lately, but truth be told, the market has basically worked off its extreme near-term oversold picture by going sideways. The market closed Friday in the middle of this digestion zone. It isn't going to stay in such a tight range forever. There is the potential for a pop higher, but absent confirmation or any new positive news, it seems tough to "spring" higher from the high end of neutral. The best reason to be a buyer for a trade was that the market was oversold and poised to bounce. Right now it isn't oversold and has not moved above resistance. It might, but given the large number of false move off of breakouts in the past three years, lets look to the intermediate-term picture for signs.

Exhibit 2 - The intermediate-term stochastic indicator hasn't changed much in the last week. Clearly, absent any negative precedent, the current "hook" positive from a deeply oversold condition would set the stage for an impressive intermediate-term rally. The only problem is that there is that precedent from last year when at just about the same time and in the same hooked position, the SPX began the last leg of the drop into the July low.

Exhibit 3 - While the stochastic indicator looks positive, the MACD indicator, has still not come close to reaching levels that have jump started prior bear market intermediate-term rallies. As a matter of fact, not one sustainable bounce has come unless this indicator reached levels well below the current reading. Maybe it is lining up to be a positive divergence, but I would opt to wait and see first.

Exhibit 4 - The same holds true for the RSI indicator. In addition, I would be remiss if I didn't point out the very clear trend of lower highs and lower lows the market is currently in. By eyeballing the below chart, it looks like the SPX put in a double bottom, but it is important to remember that the October low was below the July low on the weekly chart. That means the trend of lower highs and lower lows is unfortunately still in place.

Exhibit 5 - Maybe it won't happen again, but prior important lows have been marked by a drop of more than 15% below the 200-day moving average - usually a lot more than 15%.

Exhibit 6 - The VIX did recently get above 40, but did not get to the area (45 or above) that has indicated a high enough level of fear to bring on a sustainable rally.

All graphs courtesy of Baseline Inc.
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Did anyone notice the date - 03/03/03.
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