4, 5, 6, 7 Straight Days! Sequences Can Turn Trends

RichardSchwartz — Tue, 20 May 2008 18:28:00 GMT

UPDATE ON THE STOCK MARKET. Written, Tuesday, May 20th, 2008: 6:30 a.m.

Another one of those turnaround stock market days yesterday. At 2 p.m. things looked great but then stocks reversed downward and by the close there were more stocks down than up on the NYSE, 1479 vs. 1681. While numerous sectors actually ended slightly in the red. The Dow Industrials itself was up 150 points but closed up only 41 points. And it’s partner index, the Dow Transports reversed from a new intraday all-time high of 5536.52 (the old high was 5487.85 last July 18^th) down to a close at 5395.40. Thus the question for the Dow Transports, which is suddenly getting (too) much attention by CNBC, is why its leading the market higher directly in the face of soaring crude? My answer: Railroads, which dominate the 20 Dow Transport stocks, have a decided advantage over truckers and the like when diesel prices soar, like now. Anyway, does yesterday’s intraday turnaround mean the two-month rally is over? Or is now suspect? Swinging around in my chair, a review of my daily wall charts of the Dow, Dow Transports, Dow Utilities, S&P 500, 400, 600 and Nasdaq Composite really doesn’t show such. They are all safely locked into their upward trending channels although some, like the S&P 400 Midcap and Nasdaq Composite are ripe and ready to pull back near term, being near their upper boundaries. But I don’t see those bearish Rising Wedges anymore, they didn’t fully develop and I see no commonly-occurring, bearish Head & Shoulder Tops either. Instead I just see a continuation of higher low and higher highs which confirm the general market uptrend remains in place. Schwartz View: We’re due for some pullback, sure, after the S&P Midcap rose for some seven straight days prior to yesterday. And the Nasdaq and S&P Smallcap were up for four straight days. But I wouldn’t call this recent rally any “long move of intermediate proportions” which "Trader Vic" Sperandeo in his two excellent books of the early 1990s (get them on www.Amazon.com and elsewhere) says comes before his 4-Day Rule (of a change of trend). Maybe, but I don’t see it that way. I still assess the path of least resistance remains up, for now.

Let's look globally. ASIA just fell today after rising for six straight days so as I search around deeper my hackles remain up watching for Trader Vic’s 4-Day Rule or his reversal of trend rule. It may indeed be occurring, after I pooh-pooh it above, and that would mean the intermediate uptrend is over. Because we’ve just had four days or more up in the Nasdaq Composite, the S&P 500, 400, 600 and the Dow Transports and now I see it in the MSCI Asia Pacific Index too. Maybe it’s in EUROPE; let me check; BRB (be right back). Well, yep, it’s been four straight days up in England’s FTSE 100 Index as well, before today’s trading, in which, by the by, the “footsie” is trading down.

Schwartz View: Summing up, could this two month rally really be ending? No one could/would predict it starting off today. I didn’t see any top either waking up this morning; not before I’m realizing as I write that we’ve had so many different markets up for at least four straight days. So let’s review the background, quickly. Has anything changed since that fateful weekend of March 14^th -17^th which sparked off reversals in most financial markets? Do any of these new tow-month trends show any signs of ending? Remember when the Fed “bailed out” Bear Stearns, most bearish trends changed for the positive; the trend of stocks, gold and commodities (ex-oil), the US dollar and US Treasuries (higher yields, lower prices). Looking around, the US dollar rally may have run its course, tough to say. Treasuries have had a few days toward lower yields (higher prices), another possible reversal. Gold has rallied for three days in a row, moving back above $900 and commodities and foreign currencies are on the cusp now, with possible short term bases in effect after a two-month pullback correcting longer term uptrends. Net, net, still too soon to say with any certainty, this turn may just be a mirage, but there are some signals and sniffs that we may be reverting back to the bearish trends prevailing before the Fed backstopped the whole financial system. Stay tuned!

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4, 5, 6, 7 Straight Days! Sequences Can Turn Trends