Selling the "Good" News
by Jerome "Mel" Hickerson
The Friday session began with moderate selling pressure from the futures. The SPX saw a small gap down at the open, then sold hard until about 10:10. The next two hours continued the downward slide at a slower pace until a 25 minute period shortly after noon picked up the downward pace putting the low of the day on the chart at 12:46. From there the index chopped sideways with a slight upward bias until the closing hour. The final hour of the week saw a four point move upward but even that looked miniscule on the 16 point range day. This day started bearish, ran hard with the bears, then finished with a minor bullish pushback; the session belonged to the bears.
As a matter of fact, you had to feel that this week belonged to the bears. The last time we saw two sessions in the same week with double digit losses was in October’s pullback. The Friday close was 9.93 points lower than Monday’s open.
We keep talking about the persistent ramp upward but three of the last five weeks have closed lower than the Monday open; five of the last nine weeks and seven of the last thirteen. Yes, the up weeks have been larger; but the weight of the market is becoming apparent.
Over the next several weeks, many analysts will begin to jump onto the bearish bandwagon. But this market really began the topping process in November and has been running on vapor since then; many will begin to notice soon. The market changed in November and many failed to notice; when the SPX continued making new highs and the XLF failed to confirm.
But let’s not get ahead of ourselves. Just because the market may have topped or be near the top does not mean it’s time to only trade short side. This market may be running on vapor, but some of that vapor is steam. There is absolutely no reason to expect this market to just roll over.
As a matter of fact, watch for the “buy the dip” crowd to arrive on the scene as the week begins. We’ve got the signal that says “Wednesday’s close should be higher than Tuesday’s open.”
Let’s review the week before we get ahead of ourselves thinking about next week. There’s always something to be learned from looking at what has happened, something to help us with planning ahead.
The first chart is a 60 minute chart of the first two weeks of 2010. I’ve placed the 10 period moving average on the chart as well as drawn a red line in the 1131.5 area. It’s worthwhile to observe how the 10 MA has provided recent support as well as resistance. But most notable is the area around 1131.5; I count at least five or six bounces off that area in just 10 trading sessions.
The second chart shows the SPX daily since November. During that period we have five large range days that opened at the highs of the day and closed in the bottom third of the intraday range. The market closed lower the following day one time but all five times the market closed higher within two sessions. In all five occurrences the losses of the red bar were completely erased by the second session following. Do we have reasons to suspect that this time will be different? Maybe we do, with all the short signals I am seeing. But I am not convinced.
The final chart is one I am fond of putting up frequently just to make sure I do not allow myself to get too bearish. This stair-stepping pattern on the monthly chart should not be ignored. Until this pattern is broken, the trend is upward and we need to keep that in mind. All the technical analysis possible does not change what is into what we think. Keep trading what is.
Notes on what we learned by observation:
• The 10 period MA on the hourly chart is worth watching as support and resistance.
• The 1131.5 area is a critical area to keep an eye on.
• Recent history strongly suggests that a day like Friday leads to an opportunity to trade long-side for a couple of days.
• The trend remains upward until the monthly stair-stepping pattern is broken.
Now, thinking ahead to the abbreviated four day week. I think we’ll see a bit more intraday range expansion along with a bounce early in the week. 1143-1146 seems likely, before we once again move downward. The bullish tone of the first session of the week seems likely to continue next week, but I think we test the 50 day moving average (currently in the 1110 area but likely higher before we test it) before another test of (or break above) the 52 week highs.
Tuesday, January 19
Economics
09:00 Net Long-Term TIC Flows
Earnings
Before: C, FAST, FHN, FRX, IIVI, JEF, EDU, PH, PETS AMTD
After: ADTN, CREE, CSX, FULT, IBM, SUPX, WIT
Auctions
11:30 3-Month Bill Auction
11:30 6-Month Bill Auction
Events
UMH, LZR at NYSE Euronext Global Investor Virtual Conference
PHX, DVN, LGCY, SFY at IPAA Oil & Gas Investment
Symposium Florida
CSR Investor Luncheon in Hong Kong
HBIO Global Investor Day
NAV Analyst Day
Mel’s Random Hits:
• Total tick for the day was -106,000. Breadth was negative from the open, turned positive about 1:45 until 2:30, returned negative briefly, but closed the final hour on a positive note.
• In spite of the downward trend on Friday, there was something notable within the tick. There were no extreme negative ticks; this implies an orderly and calm sell off. There was no panic. Experience says that when the real pullback gets underway, there will be some panic as people rush to find the exit. This did not appear to be it.
• The day's range was 16.38 points. This certainly felt good for trading but still is meager range.
• The day's volume was 86.0% of the average daily volume for the last year. Volume was 119.31% of the last 10 day average. There was a lot of talk about the "heavy" volume in the chat room but I didn't see the volume as heavy. Rather, what I saw was the typical option expiration surge of heavy volume the first 15 minutes of the session. The rest of the entire day the SPX volume was pretty weak. But the two heaviest volume days of the week were the two down days, in spite of the low volume numbers.
• 3% of the SPX stocks closed with two day RSI above 90. 7% closed with RSI above 80. 39% closed with RSI below 20 and 18% closed with RSI below 10. These numbers seem to suggest a short-term bounce.
• 29% of the SPX are above their five day moving average, 39% are above their 10 day average, and 56% are above their 20 day moving average.
• 49% of the SPX stocks closed below their most recent previous lows.
• 4% of the SPX closed above their most recent previous high.
• 26.2% of stocks closed in the top half of the day's range. (73.8% closed in bottom half.)
• 26.2% of stocks closed in the bottom 20% of the day's range.
• 2.6% of stocks closed in the top 10% of the day's range.
• 14.4% of stocks closed within 2% of their 52 week high.
• 23.6% of stocks closed within 50% of their 52 week low.
• 3.8% of stocks closed within ¼% of their high for the day.
• 11.2% of stocks closed within ¼% of their low for the day.
• 13.0% of the SPX closed up from the previous close; 15.8% closed higher than the open.
• Sectors weaker than the SPX for the day: Financials, Industrials, and Technology. Notice that these are key sectors, generally market leaders, that are all weak.
• Sectors stronger than the SPX for the day: Basic Materials, Energy, Consumer Staples, Utilities, Consumer Discretionary, and Health Care.
• The $SOX index strength was again weaker than the SPX Friday.
• The 2 Day RSI of the SPX is 23. The Dow RSI is 23, NASDAQ is 27 and Russell 28. Numbers suggesting a bounce but not a strong call.
• SPX components moved downward slightly during the after hours with 80 million shares traded.
• While the indices set a lower low on the charts Friday, the advance/decline line did not confirm with a lower low. The advance/decline line usually leads; this would suggest that a significant correction has not yet begun.
• Looking for two successive down days? The last occurrence was December 7th and 8th. November 18th and 19th qualify although the 18th was less than a point down. Before that you're back into October's pullback.
• If you're thinking of two down days when the first of the two was down double digits such as Friday, you've got to look all the way back to October's pullback.
• Regarding the "bounce" signal for Tuesday. This signal fails about 21% of the time. When it fails, it generally signifies a weakness within the market. My signals are still suggesting a test of the 50 DMA soon while also calling for a bounce early next week. Everything, as always, is a matter of timing. We exited our short positions profitably Friday in anticipation of a bounce and an opportunity to reload later.
Have a great weekend!
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"Mel"
