Weekend Analysis for Fri June 27th 2008

Fri June 27th 2008
Bears In Total Control
by Jack Steiman

So why the decent push up off the lows is a question I was asked often in the last hour today. Look folks, nothing is straight down. The very short term charts such as the 15 and 30 minutes got oversold, extremely oversold in this bear and they need to unwind their oscillators thus you can get quick thrusts back up but that doesn't mean all is well. In fact, all you have to do is look underneath the hood and you would have seen some terrible news on the advance decline line. This means only a few stocks were participating in bringing the markets back up off their lows. A true reversal occurs with strong internals and we didn't come close to that today. The other factors that helped the markets rally at oversold were strong levels of support on the Sp at 1275 and 2315 on the Nas. Those are price and gap levels of support respectively. That combination got a few shorts to cover and a few brave bulls to step up to the plate. Nothing from nothing overall from a bullish perspective. Again, oversold and price but the internals were poor and thus no reason to even consider buying anything.

The most ominous thing hanging over the markets head may be the $vix. The daily chart is set up in an inverse head and shoulders or bullish pattern. if that pattern starts to play out, vix breaking over 24 with force, then the market should head lower with even greater force than it already has. It's at an incredibly low number when you consider the Sp has come down from 1440. No fear and that's just the way it is. If you add in put call readings only in the 1.10-1.15 area again all day, the fear factor has yet to hit this market hard. Can this market bottom without some intense fear? Of course anything is possible but I highly doubt it. It makes far more sense to have a strong bounce only when everyone is showing fear. If the market can fall harder on a strong move up on the vix and the put call ratio, we can finally have a real rally. As much as 500-750 points on the Dow. Possibly as high as the break down area at 11,634. That seems impossible to take place if we don't truly spike fear. Without it, all bounces will be small in nature and very short in the amount of time it takes place over. We need fear folks. There isn't any.

Oil was up huge today early on but fell back some at the end of the day. Sad when you're happy it was only up a dollar. It's not breaking away from this 140 breakout level but it's not exactly cratering away from it either. There are some negative divergences on it but something beyond anything we can understand is preventing it from falling down. We may never truly understand why it is what it is. We know demand is lessening as the economy slows not just here but abroad yet the commodity itself refuses to fall. Lots of arguments about why it's holding up but I really don't think any of us really know the right answers to this mystery. Bottom line, however, is the market has a huge monkey on its back with oil at such elevated levels. I wouldn't place any wages either way on where it's going. Just too much risk either way.

There can be no arguing the fact that this market is truly oversold at some very intense levels. In bear markets things can stay that way for prolonged periods of time and thus it's nearly impossible to try and guess when things will suddenly reverse for a counter trend rally. I feel strongly that what we need to see is a huge move up on the put call ratio. When the bears start piling in to those puts, then you know you're truly close to bottoming near term. Remember that we saw readings 1.5 and much higher than that at all the previous bottoms. Extremes are the only way to stop a runaway bear. I would suggest not trying to guess the bottom and buying oversold bounces until we see the necessary spike there.

So how do will we know when this bear is ending? We will finally see a strong positive divergence on the daily charts. So how can that set up? Easily. When we finally bottom here in the near term, I expect a fairly violent move back up to retest the breakdown levels. What we will be studying is how the Macd advances on the price move. If it's impulsive then we will likely see a positive divergence when the market heads back down again from that bounce. If the Macd behaves as it has for some months, then the bear will have a long ways to go before it's over. We can't know the answer to these questions until the moves play themselves out. It will be more than interesting to say the least.

We're on a sell signal for now so please adjust your thinking accordingly here folks. If we lose 1275 then the selling will intensify yet again and only when we get the right signals I stated above, should we think of buying anything for a sustained bounce. Please go very slow and easy here. Overall we have kept you totally out of harms way since the bear began in October. Not much more for us to do than that. Hang in there and relax.

If you have time, play with kids this weekend. It'll make you smile.

peace

Jack

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