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The Morning Cup of Jo

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Come on Tickles -- Give me some credit!

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A lower open, a morning slide, a lunchtime bludgeoning, an early afternoon 'Boo fest' and at 2: 30 PM, Hoofy snuck right up behind Boo - while being complacent and counting his daily mound - cranked up the music and busted out with, "It's... Snapper Time!" Whoa, what a day!

Hence, the problem; this action started most of the Hoofians screaming, "It's the bottom!" and/or "This is it!" Granted, the major indices were down over 1.5%, undercut prior relative lows, turned, closed positive and higher than the prior day's high (a bullish engulfing); all a good sign when looking at a reversal day.

Well, maybe that was "IT;" but I believe, probably not. It's way too early in the game to determine who's gonna win, at least not without confirmation, technical or otherwise. In other words, at present there's currently not enough technical evidence to call this "the bottom," only a possible ST bottom, but even that's vague at best.

One day does not make a trend change, nor does one person's comment on, what Professor Fleck affectionately calls, "Bubblevision." The market was in an extremely oversold condition technically and was looking for any catalyst to jump-start the buying. The only issue being, no one wanted to be first. Therefore, as for now, we'll just call Barton's comment the trigger, not the cause.

For sake of full disclosure and pure education of the process, I did take an additional step into the market yesterday by going long the Spiders (SPY: AMEX). This was purely done for a short-term trade with an extreeeeeeemly close stop.

Technically where the markets lie, or lie

This first graph refers back to a 'Jo' back on March 25th where I talked about technically sound bottoms and "The 4B's and a D." This is a graph of the S&P 500 exactly one year ago - The start of Hoofy's latest move.

This graph illustrates a "picture perfect" bottom. At point 1 the SPX shows a severe low point, Relative Low, in price after a month and a half decline. The MACD and Stochastic were showing extreme over sold conditions and the market bounced. At point 2 you'll notice the distribution, selling intensity - volume, declined as the prices dropped below the prior RL (point 1) indicating selling was subsiding. Most importantly, notice how the 3 momentum indicators were ALL showing the start of divergence (Higher lows as the price and volume were at a lower low).

The confirmation came at point B and point C. This is where the prices broke topside of the uber ST downtrend and ST downtrend on massive accumulation (buying volume) and the MACD and Stochastic crossed for a second time.

WONDA Copyright 2004 William O'Neil + Co., Inc. All rights reserved

This is today's graph of the SPX, with many similarities. However, there are a few subtle differences. First of all, the distribution increased at point 2 - higher volume selling that broke the prices below the first relative low. Second, the momentum indicators have not turned and given a confirmation of divergence.

These differences many seem small and insignificant, conversely that's very far from the truth. Many individual equities, as well as indices, have this type of pattern occur during downtrends. It happened all the time while the market was declining throughout Boo's last reign. The idea is to be able to read the road signs correctly, which will ultimately help an investor determine if this is just a "sucker rally" or the real thing.

WONDA Copyright 2004 William O'Neil + Co., Inc. All rights reserved

All that being said, I do believe there is a rally looming around the corner. But like I stated in Monday's 'Jo,' this bounce is more likely a retest of the bottom side of support that was broken. If I'm correct, the accumulation, buying volume, should subside as the markets retest those levels and we'll see further downside in the days and weeks to come. If I'm wrong, the accumulation picks up, the momentum indicators confirm divergence and the markets break above resistance.

This was intended entirely for educational purposes, not a recommendation to purchase.

I hope this helps.

Until next time...

The KAT

No positions in stocks mentioned.

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