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The Three Market Catalysts


No telling what will hit when.


Editor's Note: The following was posted in real time on our premium Buzz & Banter (click for a free trial). It's being shared here for the benefit of the Minyanville community.

My mother gave me a bumblebee pin when I started work. She said, "Aerodynamically, bees shouldn't be able to fly. But they do. Remember that."

-- H. Jackson Brown

The real issue with the current market is the debate between intellect and emotion.

The market should have had a corrective move by now, but in reality:

  • The dips that are bought into are getting smaller and smaller. In June, it was an 8% dip, and this particular move started when the market oversold at a mere 3%.

  • Whenever the market gets overbought, instead of using price, it uses time to work out those conditions. (An analogy I've used before is that it's like an athlete resting between workouts).

  • The most important sectors are in confirmation.

Here's a chart of the A/D line, also confirming the move in indexes:

Click to enlarge

In the Weekend Updates, we look at the market trends in much greater detail. My market observations are a lot like those on August 28, only the support levels are different.

I've often talked about three things that could act as potential catalyst.

1. A gradual but marked divergence in market internals and various sectors

2. A blow-off, just-get-me-in move

3. Major negative news

In my opinion, the market is no longer in the mood for subtle hints in the forms of divergences from market internals. After all, these can take a while to develop. And while declines of magnitude are often preceded by such divergences, short, quick corrections might not necessarily adhere to the same rules.

Regarding the ramp-up move, we've already looked at potential targets as defined by the downtrend line and Fibonacci levels. Here's an excerpt from the Buzz note on August 24:

"On August 13, I had shared some thoughts about potential higher targets on S&P 500, Nasdaq, and Russell 2000, coinciding with their longer term downtrend lines.

Click to enlarge

Here's another look that takes into account Fibonacci retracement levels. Now that the market is at the 38.2% retracement level (after having cleared the initial 23.6% retracement level) a breakout here might lead it to the 50% retracement, just around 1120 on the S&P 500."

Click to enlarge

The third catalyst could be some negative news that really impacts the market -- it could be a macro-level event or, given that we're entering the earnings pre-announcement phase, it could be a significantly negative pre-announcement from a major company.

Based on any one of the three catalysts mentioned, there's technically nothing on the horizon yet to warrant anything more than a correction that's most likely bought, which of course can occur anytime.

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No positions in stocks mentioned.

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