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Is the Market's Juice Worth the Squeeze?


Stocks may enjoy another few weeks before a starker reality sets in.

Is everyone now bearish and looking for a turnaround? It sure feels that way. And indeed, there are a number of technical indicators lining up to say the gas in the market's tank is getting low. But let's view this through an objective lens and evaluate the technical evidence.

It is true that we have TD Sequential and/or TD Combo sell signals on many major indices on the DAILY charts. But my take is it is important to keep in mind the context of those signals within the higher time frames.

TD Combo or TD Sequential Sell signals typically produce a reaction within 12 price bars of recording. In the case of the TD Combo Sell Signals that registered earlier this month, many of those are already at least 8 bars into their TD Combo Sell Signals (for example, both the S&P 500 and Nasdaq-100 registered a TD Combo Sell Signal April 17).

S&P 500 with TD Combo Sell Signal

In addition to the TD Combo Sell Signal shown above, a number of daily TD Sequential Sell Signals have also registered recently, quite a few on Monday or last Friday. But even so, a reversal on the daily charts may not be the one that takes us to the new lows I expect given the context of the higher time frames. And as Tom DeMark often says, markets rarely top on bad news, or bottom on good news.

So what might be one possible path and its (incidental) relation to fundamental news? The path of maximum frustration in my opinion would be continued churning in and around the 800-900 area with a potential false breakout taking us, briefly, above 900, within the next 5-8 weeks. This could very well coincide with some (any) resolution to General Motors (GM) / Chrysler and perhaps a quieting of the swine flu pandemic. (It is useful to keep in mind that these outbreaks occur in waves, and that the natural progression of all waves is to impulse and then recede).

How do I arrive at that time period? By listening to the higher time frames and speculating (the operative word here).

So let's discuss the larger time frames. The weekly charts on many major indices are currently on bar 6 or 7 this week of a potential 9 sell setup. That means we are looking at the middle of May before a sell setup, perhaps longer if, for some reason, that potential setup is not perfected.

On the monthly charts we are only two bars past perfected buy setups on many major indices that occurred in February. Because buy setups typically produce reactions within 1-4 bars, we are still at least 5-6 weeks from moving beyond that window.

The SPX weekly is on bar 6 of potential 9 sell setup, provided this week we close above 842.50 and the following week the successive price bar relationships necessary for the count to continue occur. The German DAX weekly is on bar 7 of a potential 9 this week.

Something else to watch this week: the Russell 2000, while on bar 6 of a potential weekly 9 sell setup, could qualify an upside breakout through TDST resistance if it closes above 481.30 AND opens above that close next week.

And then the Nikkei 225 this month will perfect a BUY setup IF the close is below 8859.56 on Friday.

I view this early stage of separation among market indices and stocks as a very interesting technical change for the market and is one reason I have shifted my stance, even though I expect a new low this year, from trying to play downside to looking for sectors and specific stocks that are outperforming the broad market.

There are now stocks that for the first time since the debt crisis began have DeMark indicator counts that are not virtually identical to the broad indices. Exxon Mobil (XOM)for example does not look at all like the SPX, having made a higher low while the SPX perfected a buy setup and registered a TD Combo Buy Signal in the early part of March.

ExxonMobil (XOM), higher low with recent TD Buy Setup:


As well, the Nasdaq Biotech Index ETF (IBB) will likely record a bullish price flip this week.

Among other sectors, right now, from the March 6 low, the Consumer Discretionary Sector ETF (XLY) is up 45%. It's also registering a TD Comb Sell Signal today, after a TD Sequential Sell Signal registered on Monday.

Meanwhile, the IBB is only on a 4 of potential 9 sell setup after basing for much of March and showing a deferred 12 count of a potential 13 TD Sequential Buy Signal.

In other words, these two sectors couldn't look more different. Going forward, if one is concerned about potential market move lower that drags the "good" down with everything else, short XLY and long IBB could be a way to play it. Just a thought.

In memory of our fallen friend and trusted colleague, Bennet Sedacca, 100% of the donations made to the RP Foundation through April will be channeled to philanthropic endeavors consistent with the RP mission, working closely with the Sedacca clan in the distribution of those funds. We thank you kindly for your support as we strive to effect positive change in the lives of children.
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No positions in stocks mentioned.

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