Conflict and Contrasts [7:43m]: Play Now | Play in Popup | Download (307)

In this post I’ll recap the epic struggle between the Bulls and Bears this past week. The latest battle was won by the Bulls as they fought off an attempt by the Bears to bring the markets down on Friday. I’ll examine how this struggle has been one of conflict and contrast. And on the Technical front we have two patterns competing for dominance.

We started the week on a pretty good high, with strong gains spilling over from the week before, and even in the face of extremely disappointing construction and manufacturing numbers, the markets continued to trend up, it seemed nothing would hold them back. The world markets were surging as well, perhaps in anticipation that Barack Obama would win the presidential election. The morning after the election (Wednesday, November 5th 2008), it was sell the news. At least that’s how some had described it. I would say that we were extremely oversold, and a lot of nervous Bulls sought to book profits while the booking was good. The Bears seized this opportunity to take the markets down. So, for the next two days we had intense selling, and gave back nearly two thirds of the gains achieved since the rally began the week before.

The selling was so intense that we set another dubious record for the largest two day loss in Dow history. This drastic turn of events was hard to reconcile, because it happened in the face of strong near-term positive technicals. A more muted sell-off would be normal and expected, but this selling was beyond that. I guess that’s been the name of the game since this crash began. The interesting thing is that even though the reversal was hard, we didn’t break down out of the current patterns. In fact, the MACDs on all the indexes, including AAPL barely budged. It was still pointing up!

That’s one of the reasons why we didn’t continue to breakdown on Friday, we were also extremely oversold in the near-term. In any case, the Bulls showed remarkable resilience, as they held off the Bears for the entire trading session on Friday. Every attempt to bring the markets down was thwarted, as the Bulls bounced off the bottom of the triangle that forms the Bearish Pendant that I described in Thursday’s podcast. This all suggests that the Bulls have regained their composure and that they’ll be gunning for the tops of the pennants. But first they need to recapture the 20 Day moving averages, and that would be 960 on the S&P and 1713 on the Naz. Once there, the next test will be to break up through the top of the respective pennants. So, for the S&P that would be approximately 980, and for the Nasdaq it would be around 1740. So, those are the levels we need to see taken out to break the back of the Bear. Can we do it? Only time will tell.

So, what makes me think that we have any chance of breaking through the top of the pennant? Isn’t a bearish pennant a powerful continuation pattern? Well, yes it is. But we have a few things going for us. The first is that the MACDs on the daily charts is still pointing up, and on the 60 minute charts we’re extremely oversold, and very close to the MACD fast line crossing over the slow line. So, if the oversold conditions start the buying up on Monday, the n the MACD will likely cross over flashing a buy signal.

But that’s not the only reason for my optimism. We have two competing patterns at work here in the 60 minute charts, and they’re both sharing the top of the pennant trend line. Of course we have the Bearish Pennant that we’ve been so focused on, but we also have what looks like an Inverse Head and Shoulder pattern forming, and the top of the pennant is the Neckline of this Head and Shoulders. It’s interesting to note that I mentioned in my closing remarks in this past Monday’s podcast that this pattern might be forming on the S&P 60 minute charts. It would be quite prophetic if it comes to pass.

So, those are my reasons for optimism, but as always I must temper that optimism so as to stay grounded in the full reality of the situation. So even though we have some Bullish action going on, and even though technical indicators seem to be in our favor, and patterns that appear ready to break, I have to take note of the lack of leadership by the leaders. In particular, Apple (AAPL) and Google (GOOG), both of which seem unwilling to join in with this bullish action. The only thing that is keeping me in the game with these two is that they are both at the bottom of their respective triangles, and are perhaps ready to participate in an upside move this coming Monday. The other thing thats bothering me is that the Nasdaq up volume on Friday was 500 million shares lighter than the down volume on Thursday. On the other hand the ratio of the up volume to down volume was a healthy 3 to 1.

So what we have are a number of conflicting indicators. We have the poor Volume trend, upstaged by a strong MACD, then there’s the dichotomy of the opposing patterns, and finally there’s the excellent over all price action across the board, but with leaders like AAPL and GOOG which are simply not participating. So, if faced with these standoffs, what should you do? Well, I rely on what I consider the primary indicators, and that’s volume and the MACD, and if I had to choose between the two, then I would pick the MACD, as it’s a better barometer for momentum. So, given the strength of the MACD, I think the chances are best that volume will improve going into next week and the market will move higher.

So, most of this analysis has been concerned with the near term, the dailies and 60 minute charts. What about the longer-term outlook? Well, that’s difficult to say because the weekly charts seem to be at a pivot point, where they can resume the downward trend, or react to a sharp move up on the dailies, which will start a new uptrend for the weekly MACD. For now, we seem to be stuck traversing the boundaries of the pennant. And until we can break either to the upside or down, it will be very difficult to read where the market ultimately wants to go. One thing for sure is that this is a crossroads for the markets. And you have to ask the question, have we seen the bottom, or are we in for more pain?

The Investor in the Wilderness Podcast

That’s right, many of the Wilderness posts are now also simulcasts as podcasts. You can subscribe to the Wilderness podcast on iTunes Just Click here, or click Gyasi the Ridgeback to the left. My goal is to produce a podcast prior to each trading session that helps prepare Wilderness Investors, and one on the weekend that will cover a variety of topics. Listen to a few of the episodes, and if you like it, then subscribe and leave a review.