Technicals Suggest, Not Guarantee, Rally Is Over.

RichardSchwartz — Fri, 23 May 2008 14:36:00 GMT

UPDATE ON THE STOCK MARKET. Written Friday, May 23rd, 2008: 6:30 a.m.

Stocks normally bounce after two or three days of sharp declines. And the size and cope of a bounce is telling. So yesterday’s “bounce” proved disappointing. For perspective, take the Dow Industrials. The Dow rose +24 points or +0.19% yesterday on trading volume of only 216 million shares. This after losing -200 points on Tuesday on volume of 265 million shares and another -227 points Wednesday on 266 million shares. That’s a total loss -427 points or -3.2% over the previous two days before yesterday’s small bounce and as you can note, the two down days came on higher trading volume than yesterday’s up day. All in all, a negative trend and pattern and not much of a bounce either. Maybe today will show some further bounce but we’re certainly not being helped by global trading as ASIA was mostly down and EUROPE is down everywhere I look going into our market opening here. Maybe we’ll rally next Tuesday, the first day of trading after the long Memorial Day weekend, as the Hirsch’s STOCK TRADER’S ALMANAC says normally proves to be the case. ‘Course most days after Memorial Day are usually buttressed by strength at the start of a new month as well, but this year there’s three more days of trading in May after Memorial Day so that’s an X-factor. Schwartz View: Whatever, the , big question is whether this two-month rally in the market after the sharp declines of the previous five to eight months in the various averages is over. Or not. No one knows for sure. All we can do as speculators and traders is to is play the odds and go with the flow. We have some technical signs that the rally has ended, like the fact that key indices such as the Dow, S&P 500, Nasdaq Composite and S&P Smallcap all failed to hurdle their long term or 200-day moving averages when they ran up against them kicking off this week. These long term or about seven month long trendlines are now pointing down, another negative as many professional investors use these lines and their direction, up or down, as key guidelines to the longer term trend. Also, as I started pointing out on Tuesday, we had four straight days or more sequences up in many of these same indices, many times according to “Trader Vic” Sperandeo, an indicator that the last buying power is being sucked out of the uptrend. Followed by a sequence of four straight days down by the Nasdaq Composite and the S&P Smallcap, an offshoot of the same reversal-of-trend indicator which has proven pretty reliable (not perfect) since I’ve been tracking it over the last couple of years. Add in numerous bearish “distribution days” as tracked by Investor’s Business Daily (IBD). IBD turned bearish yesterday, pointing out that trading volume has been low on this rally while breadth has been weak, both signs of a dead cat bounce rather than anything sustainable. All in all, I suggested cutting back the additional exposure shorter term players put on near the March bottom and followed my own advice. Now let’s sit back and wait a few days to see if this rally is over or just shaking some of us out.

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Technicals Suggest, Not Guarantee, Rally Is Over.