Wednesday, November 04, 2009

What Technicians Are Worried About?

The market is getting a nice bounce today on the heels of coming off extreme oversold territory, and what looks like some relief from the elections last night that maybe the healthcare reform will be more mild, and this has the HMO stocks rallying strong.

Getting to the charts below, you can see from these three examples that many of the key indexes put in double-tops in October; they then proceeded to break below their longstanding 50-day average support; and finally, they broke below their early October lows, leaving a lower low on the charts for the first time since the rally off the March lows began.

These snapshots below are as of Friday, so these indexes have bounced a bit as of this morning, but they are still right near the resistance represented by the lower horizontal line drawn on the graphs below. The first step toward recovery will be recapturing those levels, and converting this near-term overhead resistance into support.

From there, we will need to see the major indexes recapture their 50-day averages. This morning, the S&P 500 is trading above its 50-day, so that is a start. Many of the other indexes still have room to rally before they reach their overhead 50-day averages.

I don't view all of this as ominous a sign as the bears would like you to believe. It's true that this action likely means a longer correction than we have seen in a while, but you never know. A flurry of buying could change things quicker than most expect. Most normal corrections average in the 3-6 week range. If we agree that the market topped on October 19th, than we are currently in Week 3 of this correction. That means it could end soon, or maybe chop around until we get closer to the Thanksgiving holiday.
I have said that you can't just look at the technicals alone, we also need to pay attention to what is happening with sentiment. The indicators I track do show that bearish sentiment has been on the rise, which plays into my thesis that this correction is mostly over.
Today the FOMC meets, so we could see this early rally fade, or pick up steam. These Fed days are tough to guage.
The dollar is lower today, which is really boosting commodities. Oil topped $80, and gold hit new record highs above $1095 before settling in around the $1090 level.
Asian markets were higher overnight; the 10-year yield is higher at 3.50%; and the VIX is -6.4% lower to 26.97.
long GLD, SSO


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