Bulls' Hope Springs Eternal
Will the bulls who loaded up on longs on Wednesday be flushed out today if there is no upside follow through?
-Emotional Rescue (The Rolling Stones)
"You can not intellectualize the daily movement of this market."
"This is the most volatile market I've seen in fifty five years."
-John Bogel, mutual fund pioneer
Was Tuesday a successful re-test of the August 16 low?
A look at the chart below of the cash S&P shows that the index found a low on Tuesday at a level that matched last week's low. Wednesday's reversal offset almost all of Tuesday's loss.
Click here to enlarge.
Tuesday's low also matches the level of the lows in the first week of August, inspiring hope amongst the bulls that the S&P is tracing out a possible inverted Head and Shoulders bottoming pattern.
One of the sharpest of old Wall Street trading saws is that follow through is key. Given Tuesday's large range stab down, which closed on the extreme low of the session, it is surprising there was no follow through whatsoever. Typically, legitimate reversals after such extensions occur from an early probe lower that turns green. Nevertheless, the price at Tuesday's close was close to a cluster of crucial support:
50% of the range from last Friday's high to the August 16th low is 1425. The weekly swing chart low is currently 1430.55. The low of the first leg down was 1427.40 while the closing low of the first leg down was 1433.05.
Moreover, the closing low for March 21, the Spring Equinox, and the beginning of the year, was 1435.05.
The normal expectation, however, would have been for some kind of downside follow through on Wednesday morning. So, you have to wonder if Hanky Panky and the Merry Pranksters are up to their old tricks. There certainly seemed to be a lot of "calls" and rumors from many corners of the Street that a Fed funds rate cut was imminent. The rumor was that the Fed pulled back from injecting liquidity on Tuesday to see what would happen, got its answer and had decided to cut. The rumor made the rounds but is Bernanke likely to make a move in front of a speech in Jackson Hole on Friday?
Is it more likely that the last day to sell this month for three day settlement was Tuesday?
Be that as it may, it is remarkable exactly how much the Street is pinning their hopes to the expectation of a cut in the Fed funds rate. It is remarkable just how addicted the Street is to cheap and easy money. It is more remarkable that it is delusional about the "fix" of lower rates when the current issues are more properly viewed through the prism of not a liquidity crisis but of a solvency crisis.
But you can never underestimate the Big Dogs and the Bid Dogs' Pavlovian response. After all, since 1998 the siren song of cheaper money and bigger and bigger bubbles has worked. Never mind that little interlude from 2000 to 2002.
The daily chart of the S&P shows a channel of price action defining the short term trend. The label A marks what a chorus of bulls is poised to proclaim as a successful retest. Certainly it is impressive that the index recaptured its 200 dma with one stroke.
However, a declining trendline (label B) which is the top end of channel resistance is just overhead at approximately 1470. If 1470 is breached the S&P may spike to its 50 dma and tag the Monthly Swing Pivot at 1484. This is where the monthly swing chart turned down in July on a break of the June lows.
Will the bulls who loaded up on longs on Wednesday be flushed out today if there is no upside follow through, just as the bears who loaded up on shorts on Tuesday got squeezed on Wednesday?
The prevailing position of the market is one of a successful retest or a complex consolidation prior to another leg down after Mr. Market shakes off as many players as he can. A break of Tuesday's lows and follow through below 1425 and last week's lows should severely pressure the market.
Because the decline from last Friday's high did not even give two lower lows on the daily chart I remain skeptical of the sustainability of any rally attempt. Because time has not run out, according to the historical precedents for sharp declines, I remain skeptical.
It will be interesting to see the behavior if the S&P in fact traces out a third lower high (from the July 19 high) below its declining 50 dma as fast moves many times come from such patterns.
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