Weekend Analysis for Sat August 16th 2008

The Sp is riding that rising wedge as it continues to try and move higher. Every time it has hit bottom support and threatened to lose the wedge it has found a way to rally back. There have been times when it has been near or at the bottom of that wedge and bad news hit. it seemed obvious that the bad news would be the culprit to break down below the bottom of the wedge. Each time it has failed to break down. Earlier in the week the bottom of the rising wedge on the Sp was at 1270 but it has now risen, as it does each day, to 1282. The top of the wedge is up to 1318. The Sp closed at 1298. Sixteen points above the breakdown and twenty points below the breakout. In the middle of nowhere. No matter what slant you may have you have to recognize how difficult it is to trade heavily until one side of the wedge breaks and breaks with power behind it. Whenever you're trading in such a tight wedge it's best to show a little restraint and wait for the move. Unfortunately, many try to guess which way things will break and get whipsawed out. The daily and weekly charts are bullish and the 60 minute charts are bearish. A fairly nasty 60 minute negative divergence at that. Also, if you wan to be critical, you can say that although the daily's look good they have elevated Macd's just above the zero line. Now just above zero isn't elevated but when you factor in how low the Macd's were at the price bottoms, the zero line is considered elevated and the area where bear markets take the price action back down. There is nothing but good news on the weekly's as they continue to have positive divergences at the very bottom of the Macd cycle. You'll also see a chart in tonight's letter of the ten year monthly chart. Pay close attention to stochastic's. Whenever it has reached 20 or slightly lower in the past years a very strong rally began. It is now at 17. Most rallies in the neighborhood of 20%. We have risen nearly 10% off the bottom to the recent highs. We don't have to keep going up but it is an interesting case study and of course it wasn't straight up. Just something to keep in the back of your mind if somehow the bottom of the wedge, again at 1282, continues to hold. If that wedge gets taken out you MUST respect that message.

The bears will say tonight that the options expiration had a lot to do with the market holding so well after all the bad news that hit the market this week, especially the news from the consumer price index showing inflation is truly getting out of control. Add in another poor jobless claims report and you had enough bad news near the bottom of the wedges to break them down but the argument being the market makers wanted things to close where they did to protect their own interest. That the market was propped up higher intentionally. By now we should all realize that the market makers can do whatever they need to come options expiration week. They can hedge as need be thus I have felt for a very long time that far too much trading energy is given to this event every third Friday of each month.

When we look around and try to understand why the market is holding up I think you don't need to look much further than the weekly's and add in that ten year Sp monthly chart and its stochastic's for good measure. Again, by no means does it mean the market will continue to hold up but I still think 1200 Sp will have a hard time being taken out if and when the bears finally break this wedge down. The financial's continue to perform poorly overall and lets face it, they will have to get some very good news to help allow anything not tech break out. It's really hard to imagine the market becoming so bifurcated that the financial's can remain in a bear market and the rest of the market start a new bull. That's NOT going to happen. Without the financial's there can be no bull anywhere over time. It does seem hard to believe that the bad news has washed out everything in that sector it needs to so we have remain on guard for some much deeper selling there. Until the financial's can bottom there will be nothing great anywhere else. Out performance yes but no bull market. Lots of chopping is all and thus lots of frustration to be had by all.

Rotation is now the name of the game. Since we bottomed at 1200 Sp we have been watching money move from sector to sector on what seems like a daily basis. That's not bad news of course but the fact that money can't find a consistent home isn't exactly good news. it seems almost as if the market is trading off the price of oil. As oil has fallen 30$ off its top the market has risen over 100 points on the Sp. The transports and just about everything trades on how oil is trading and that's tough to trade off of. Day to day is tough when you basically have to figure out what oil is going to do. It's in a confirmed down trend but very near major support and very oversold thus further reason to believe the market won't be able to make the breakout at this point in time. Oil and many other commodity stocks are at support or showing a positive divergence at their bottoms. If they rally some in the days ahead we should see some selling in the market but it'll be the depth of the selling that we'll be watching closely. The bears, again, need to take the Sp below 1282 to get some deeper selling that can come along more rapidly. Let's go very slowly here and discover the markets intentions in the next few days.

Peace

Jack