Bears Claw Back from Early Rally
by Jerome "Mel" Hickerson, MarketsPath.com
The bulls woke Friday morning in the mood to party. The GDP numbers released prior to the open had the futures in positive territory and the market opened ready to rock. A three wave assent took the SPX to the high of the session at 10:32 before a sudden but never ending wave of sellers showed up. There was little respite the rest of the day as the bears were relentlessly in control of the tape. Bulls had their horns chopped off for trophies by the end of the session.
It’s obvious; bears now control the tape. Everyone sees it; everyone agrees.
But does that make it so? Maybe. Maybe not. In this report, since everyone I read has a bearish slant on their viewpoint, I will take the opposite view in order to keep things fair and balanced.
If you’ve been trading for a while, you know you’ve seen this scenario before; not really that long ago. Harken back to July 2007. (I remind readers that using the October 2007 rally high allowed me to suggest in early November that SPX 1150 would be the high for this rally - there is value in studying the action of previous rallies.)
In late July 2007, the SPX was fresh off a 52 week high just days before. And then the bottom fell out; the VIX jumped up more than 20% and the SPX sold off day after day; the bears were relentless. The last two weeks of July were remarkably similar to the two weeks we’ve just seen. (See top chart, left side.)
The month of July 2007 closed with an outside bar that closed lower than the previous month, just like January 2010. (See top chart, right side.) The similarities are powerful. The wild VIX moves; the overwhelming bullish attitudes changing to extreme bearish attitudes within days; the long never-ending rally beforehand; the fresh 52 week high being rejected.
At the end of July 2007 traders were convinced that the rally was dead, yet the highs were not put on the charts until October. I am not saying the same thing will happen now but it pays to keep history in mind and not get too carried away in the moment. The market has a way of snapping back that shouldn’t be underestimated.
January 2010 was truly an ugly month to paint on the charts; certainly by far the worst month since the rally began. It paints a obvious sell signal on the monthly chart.
Large range outside months are somewhat rare on the charts; let’s examine them and see what, if anything, we can learn.
Since 1995 there have been only 14 large range outside months down.
10/97 11/97 The following month closed up.
05/99 06/99 The following month closed up.
01/00 02/00 The following month closed down.
07/00 08/00 The following month closed up.
09/00 10/00 The following month closed down.
01/02 02/02 The following month closed down.
12/02 01/03 The following month closed down.
03/04 04/04 The following month closed down.
01/05 02/05 The following month closed up.
03/05 04/05 The following month closed down.
05/06 06/06 The following month closed even.
02/07 03/07 The following month closed up.
07/07 08/07 The following month closed up.
01/09 02/09 The following month closed down.
Six times the following month was up, seven times it was down, and once was dead even. About the only thing that can be learned from this is that a large range outside month down doesn’t tell us much about the next month’s market. It certainly doesn't seem like an overwhelming negative.
But January was even more unique; it was a large range outside down month that closed below the previous month’s low.
Those months with outside bars closing below the previous month’s low are even more rare; what can be observed by limiting our view to just those months?
05/06 06/06 The following month closed even.
02/07 03/07 The following month closed up.
07/07 08/07 The following month closed up.
All three traded significantly lower before closing the month recovering losses. It’s a very small sample; these months are rare. But all three examples closed the following month no worse off. Based on the small sample of only three occurrences in 15 years, the sell signal seems short-lived.
So my point is this: We can’t know what will happen for sure; not even the bears. The bears have danced in late June and late October, and a very few other times during this rally. Bulls are dehorned and they have been clawed by the bears. But bulls are not decapitated. A retest of the 52 week highs seems reasonable in the upcoming months. It may not happen, of course, but it seems unwise to be too certain that it will not.
Two further notes: It's hard to not be aware of the inverse correlation between the US Dollar and the equities market. The current strength of the dollar has added to the carnage in the SPX. But the dollar has shown a strong tendency to sell off when the RSI hits 70. (See middle chart.) The dollar is currently at the RSI 80 level and any weakness in the dollar would seem likely to spur the equities to a mild snapback rally.
And finally, at the risk of looking silly, I'll point out that the market has shown an amazing tendency to turn on the major phases of the moon. The final chart shows the SPX since late May with the full and new moons annotated. This chart could just have easily have gone back years; the data is similar no matter when you look. Of course, it could be a simple coincidence; you make the call.
Monday, February 1
Economics
08:30 Personal Income 0.3% cons.
08:30 Personal Spending 0.2% cons.
10:00 Construction Spending -0.3% cons.
10:00 ISM Index 56.7 cons.
Earnings
Before: AMG, ACV, CYOU, EPD, XOM, GCI, HUM, SOHU, SYY
After: APC, HOLX, LOCM, OTTR, RCII, TUP
Auctions
11:30 3-Month Bill Auction
11:30 6-Month Bill Auction
SPX Summary for Friday, January 29, 2010
94 Advancers/403 Decliners
Today's SPX component winners and losers:
• Largest one day loser is AVY with -14.49%
• Largest three day loser is QCOM with -16.60%
• Largest five day loser is X with -19.17%
• Largest ten day loser is X with -30.14%
• Largest one day winner is THC with 7.59%
• Largest three day winner is EK with 35.56%
• Largest five day winner is EK with 39.91%
• Largest ten day winner is EK with 20.79%
*** SPX Technical Summary ***
The lowest 14 day RSI component is MUR; the highest 14 day RSI component is BNI. The average 14 day RSI of all 500 components is 34.
The greatest positive five day momentum component is EK; the greatest negative five day momentum component is X. The average five day momentum of all 500 components is -1.9. Notice that momentum to the downside is decelerating, not accelerating.
8.60% of the SPX components are giving a crossover Buy signal; 75.20% of the SPX components are giving a Sell signal. This is an 8.7 to 1 ratio of Sell signals over Buy signals.
SPX component signal changes today (evidence of trend):
• From Sell to Neutral: 7 components.
• From Buy to Neutral: 4 components.
• From Neutral to Sell: 66 components.
• From Neutral to Buy: 9 components.
Mel’s Random Hits:
• Total tick for the day was -202,000. Until around 11am, this session belonged to the bulls. But after that, only a brief period between 12:30 and 1:30 was positive.
• The day's range was 24.86 points.
• The day's volume was 98.23% of the average daily volume for the last year. Volume was 107.3% of the last 10 day average.
• The week’s range was 2.94%, 32.10 points. As ugly as it was, the SPX lost “only” 17.89 points for the week. Compare that to the 44.27 point lost for the previous week. Momentum to the downside is decelerating, not accelerating.
• 1% of the SPX stocks closed with two day RSI above 90. 4% closed with RSI above 80. 67% closed with RSI below 20 and 48% closed with RSI below 10. These are amazing numbers, rarely seen.
• 13% of the SPX are above their five day moving average, 12% are above their 10 day average, and 14% are above their 20 day moving average.
• 57% of the SPX stocks closed below their most recent previous lows.
• 3% of the SPX closed above their most recent previous high.
• 8.0% of stocks closed in the top half of the day's range. (92.0% closed in bottom half.)
• 67.2 of stocks closed in the bottom 20% of the day's range.
• 0.6% of stocks closed in the top 10% of the day's range.
• 1.8% of stocks closed within 2% of their 52 week high. 8.8% of stocks closed within 5% of their 52 week high.
• 29.8% of stocks closed within 50% of their 52 week low. 10.2% of stocks closed within 25% of their 52 week low.
• 1.0% of stocks closed within ¼% of their high for the day.
• 35.2% of stocks closed within ¼% of their low for the day.
• 21.4% of the SPX closed up from the previous close; 11.0% closed higher than the open. With the gap open being crushed, I am surprised to see that 11% still closed higher that the open.
• Sectors weaker than the SPX for the day: Basic Materials, Energy, Industrials, and Technology.
• Sectors stronger than the SPX for the day: Consumer Staples, Consumer Discretionary, Utilities, Financials, and Health Care.
• The $SOX index strength was weaker than the SPX again Friday.
• The 2 Day RSI of the SPX is 7. The Dow RSI is 8, NASDAQ is 7 and Russell 11.
• Over the last five sessions, the average session closed 37% of the range above the low. Obviously, this is the longest such stretch since the rally began almost eleven months ago.
• 268 SPX components moved upward and 120 components downward during the after hours with 300 million shares traded. The two-to-one ration of stocks advancing is interesting to note but means little on a Friday after hours session; the heavy volume seems odd.
• In spite of my arguments above, and in spite of the fact that I believe the SPX will bounce soon, I am not bullish longer term.
Have a great weekend everyone.
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"Mel"
