Stock-Market-Observations

Those of us who keep the volume oscillator are very much intrigued by the recent strength in the volume oscillator which suggests a new Short Range T has been formed. It meets the Kemp criteria which basically says if the market is oversold on a intermediate basis and starts to make oscillator rising trend bottoms then the odds of a sustainable up trend are high. However in this case we have a conflicting Rate T low projected for the end of July or early August so even a new T is going to have problems and we need to look more closely to the alternatives detailed below before reaching any conclusion. No conclusions can be reached at this time, but with a few more days data, the outcome will be decided as noted below. I remain bearish until then.

The easiest way to deal with the situation starting from the close on July 3, before the N. Korean rockets began to fly, is look at the very simple interpretation of the S&P index (SPX) vs its 55 day Exponential Moving Average (EMA). You can plot this at http://www.bigcharts.com by asking for a daily SPX graph with a 55 day EMA. You will see the closing SPX value for July 3 was about 1270 for the EMA vs 1280 for the actual SPX. This upside penetration of 10 points is only marginal and may be reversed on today’s N. Korean news so we need to watch closely tomorrow.

I am not able to post my regular charts right now because my program is being upgraded to include the Kemp criteria and Rate T influences over a long history in order to make some more profound sense of their obvious interaction. I will simply describe in words what is likely to happen here and you can follow the action in your own SPX web chart.

The main point of the 55 day MA is that in all ongoing bull markets, the 55 Day MA is rising, and normal pullbacks should hold at the 55 day MA, excepting for minor downside penetrations, which should bottom just below the 55 day MA, and are allowed just for a day or two before quickly reversing to the upside. The normal bear market scenario is exactly the inverse. The 55 Day MA is declining and counter trend rallies should peak at the 55 Day MA, now 1270, but minor upside penetrations of a day or two are allowed. So if the trend is still down, the upside penetration of the last few days will prove to be a fleeting and quickly reversed event. This could be confirmed by a quick drop under the 1270 MA level this week. In this event the outlook fails to be bullish despite the new T and the real low will come later, maybe a month from now, maybe in the Fall.

Of course without seeing the next few days, I would expect the market to fail in its attempted upside penetration for the simple reason that Rate Ts seem to rule the situation more than the Volume Oscillator Ts, so a more successful sustainable low should be delayed at least until later this month. As long as the market can not enter a sustained advance in the days immediately ahead this is my conclusion. This must be verified because the Rate T low time estimate of late July/early August could be in error for a multitude of potential reasons. If the advance proves sustainable in the days ahead I will post an update but you would easily see it developing using this criteria.

The alternate potential for a short term tradable rally from the Rate T low in late July would require a pullback now and a holding of recent lows (S&P 1240-1220) during a July correction. Most of the June lows saw basing at S&P Cash 1240, but a dip to 1220 did occur. So support at these levels late in July would suggest the possibility of a rally in the late stages of the new T that might be tradable, but still probably not a good long term investment opportunity. Investors should concentrate on the late October low which I believe is the most sustainable buying opportunity looking into 2007.

The most serious potential negative outcome would be a complete breakdown in the S&P below this 1240-1220 support levels. This would set the stage for an aborting Short Range T that could see a steepening decline into the Fall. This could come about if the earnings reports, which will be coming out as we move more into July, prove disappointing or new inflation data make investors more nervous over prospects for further Fed rate increases.

I know this analysis is complex and requires very critical review of the S&P trends in order to isolate which of these three alternative scenarios is developing, but the market is becoming increasingly complex in its influences as all sorts of problems surface. You might think that the Volume Oscillator holds the key, but in most trends new T’s have to deal with a variety of alternative scenarios and the S&P vs its 55 day MA hold the better key to determining the important resolution.

For the longer term investor the picture is ultimately confused by a much more powerful opposition as an “immovable object” meets an “irresistible force”. This is where the heavy battle will be fought in the weeks ahead and the outcome should become clearer as we move into late July or early August. The “irresistible downside force” is the historically persistent 4 year cycle that has produced lows each 4 years bottoming roughly at the middle of the Presidential election cycle near the mid term election period which will be in early November 2006 time period for this election cycle. The irresistible nature of this unexplainable negative force has been documented by its advocates who claim the average percentage decline for this down cycle since 1934 is a bit over 20%.

Declines in excess of 20% are generally classified as bear market declines, so this event, if ever proven, would not make my Advance-Decline T concept very happy as they counter-claim that since 1929 there have been no bear markets in an ongoing Advance-Decline T bullish projection. This implies that the bull market started in early 2003 can’t have a 20% bear market decline until after it peaks in August-September 2007. These two outcomes are obviously completely dissimilar and I think the next few market days can isolate the possibility that one or the other might win. This is my most significant focus and I will post an update to this bigger picture conclusion as soon as the outcome seems clearer.

If the A-D T is to win the battle starting right now, the S&P would have to find support at the 55 day MA (S&P 1270), for whatever reason, and right now. Further the advance could not halt until the S&P was far enough above the 1270 MA that it would hold any reasonable short term correction. This is unlikely in my mind, but still is a possible scenario. It wouldn’t easily be seen in the days ahead since the market is technically ripe for a correction which would negate this scenario. But if no correction is forthcoming in the days immediately ahead, then it becomes more likely. Still I would have to see it, in order to believe it.

Alternatively, the extreme downside 4 year election cycle scenario has only been developed historically after a new Short Range T, just like the one that has just developed, fails drastically following its initial rally and allows a new market decline to drop precipitously below the initial low (S&P 1240-1220). For this extreme negative to be confirmed, the current rally would have to fail persistently, starting right now, with the S&P moving under the 1240-1220 support within a week or two. Obviously neither of these very bullish or very bearish extremes could be overlooked, so the next few days will likely tell the story. And since either extreme would be easily recognized, I think we can wait for one of the two to be confirmed, or alternatively be resigned to a sideways trading range if neither is confirmed.

I will post any important conclusions when they result, but I think this summary of the alternative scenarios is all we need for this posting. An update will come as soon as new data is available. I will post a few clarifying comments early next week in any event just to round out this important topic.

Terry Laundry