Wednesday, September 05, 2007

Technical Update: Head & Shoulders Bottoms?

Despite today's pullback, I think the recent action in the markets has been constructive. Last week, the market had some strong advances on rising volume, demonstrating marked accumulation.
If you look at the charts above, you could make a case that the indexes are carving out 'head and shoulder' bottoms. I think this adds to the notion that although volatility will persist, the odds of breaking to new lows are becoming less likely.
Today, the volatility indexes are spiking higher by more than +10%; the ARMS Index is high at 2.03; and the put/call ratio is elevated at 1.27. These are high levels of angst on the part of investors.
Should the market fail to break to new lows, there is likely a lot of new short positions that could pressure managers to cover, thus driving the market higher. Without another significant pullback, performance anxiety could set in again like last year, which turned out to be a very good Q4.


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