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Sunday, August 22, 2004
Good evening friends,
Market Recap
Friday was options expiration day and the market was able to book some solid gains. The Dow gained +69 points, the NASDAQ gained +18 points, and the S&P gained +7 points. Volume on all three of these indices was again below average which seriously questions the validity of the rally. August has been another bad month for stocks. As mentioned before, August is historically one of the worst months of the year for the market.
Recently we have had a technical a bounce in the market. These bounces occur when markets are over sold. I presented a chart of the NASDAQ last week showing the 38% Fibonacci retracement level and stated that if this level is reached, there could very well be a bounce. The market proceeded to drop to this level, and it was at this point that the market started to bounce. With the three major indices all trading below their respective 50 and 200 SMA's, there is much work to be done on the charts before any meaningful advance can take place.
I still maintain that this market will go down further before it goes up. I say this for several reasons:
1. The market is in a clear down trend - Down trends are established by a series of lower highs and lower lows and the charts clearly show this trend.
2. In a market meltdown, most stocks tend to trade in the direction of the market - This explains why on a percentage basis there are very few charts of stocks that we should take long positions in.
3. The advance/decline line favors decliners almost daily.
4. The 52 week low list out numbers the 52 week high list by an enormous margin.
5. Volume has been less than average most of the summer.
6. The Fibonacci 50% level is the most popular of the three main Fibonacci levels - In other words, it is hit more times than the 38% and 62% levels are. In this case, the mathematical probabilities favor the markets going down further.
Trading with technical analysis is all about probabilities and knowing when to trade based on stacking the numbers in your favor.
Volume Required
Volume is much an important indicator I'll continue to drive home this significance of this indicator. Before getting too excited about the recent technical bounce, more meaningful volume confirmation is required. Otherwise the possibility of another washout to new lows is very possible. Volume will come from institutions when the time comes but it has not happened yet. There is much work to be done on the charts as well before we can consider this market to be healthy and ready for a sustained long term advance.
Capitulation and the VIX
Capitulation is a period at the end of a bear market when pessimism is at its peak, leading to high volume losses and technical breakdowns. It is at this time when a turning point can lead to a sustained rally and a new bull market. This has not happened yet as there is no fear in the market. A reading of only 16 on the VIX (volatility index) confirms this. I am still in the camp of waiting for heavy institutional buying to return to the market, this will confirm any and all rallies that may occur.
OTC BB Watch List
- MDPA
- IOTN
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