Today definitely marked a distribution day, as all the major indexes closed lower on increased and above average volume. In fact, as you can see in this chart, the Cubes gapped up at the open and proceeded to sell off for the rest of the day, closing near the low. As mentioned in yesterday’s posting, inflation fears and inflation (and the resulting rising interest rates) are the major financial issues. Get used to hearing it, inflation, inflation, inflation. It’s showing up everywhere you look except the backassward government inflation indexes, one of which is due out tomorrow. In any event, back to the chart, it’s always possible that today could have just been a shakeout in the handle area of various bases forming handles or a check-back to the breakout point on some recent breakouts, for example the Cubes, which you see down near the recent gap and the 50-day moving average. Still, this marks the third week in a row of some influence or another: holding breath before employment report, a holiday-shortened week, the start of the earnings period, and now options expiration week. In my view, it’s best to keep the powder dry right now. PS: Coming up on poor seasonals: (“sell in May and go away”).
The cubes appear to be forming a handle about 5% off their 52-week high. This coming on low volume and after a prior advance that ended on January 26th (see left side of chart). This could resolve itself either way, and because this week is an options expiration week short options players have an interest in holding things tight until this month’s options are wiped out after Friday’s close. The market sure is holding its breath today volume wise, that’s for sure. I was kind of expecting some volume and a relief rally after the holiday week/weekend and no major event (Iraq, Japanese hostages, bombings, etc.). A catalyst will likely come in the form of earnings news sparking a rally, earnings news failing to spark a rally (which would be more telling), or inflation news trashing the whole china shop (CPI Wednesday). Of course catalysts can always pop out of nowhere, too!
So did we kick off a new leg up or was it just a snapback and short-covering rally that developed from the oversold conditions of a few weeks ago? Some small-cap and sector indexes have already broken to new 52-week highs and the major indexes are getting pretty close, but the volume seems a little light, but that is at least partially explained by the fact that last week was a holiday-type week and the week before everyone was holding their breath ahead of the employment report. This will be the first week for volume (and the market itself) to show itself. It’s also the week that the earnings floodgates open. An interesting question is raised by the mixed reactions we got to last week’s retail sales reports, which printed big-time numbers, but prompted selling on the news (i.e., selling on good news can be a warning sign). We will see. Also will be looking to see if divergences develop if/when we test new highs on the major indexes or if we get any distribution days. And watching YHOO to see what happens after is massive breakaway gap from it’s 3-month base.
The wait is over and we finally printed the blowout payroll number (Consensus estimate was 123,000) and the pre-market futures are off to the races. If strong gains hold into the close and we don’t get a reversal candle (i.e., big upper shadow and close near the low) today could be the follow-through day to the Naz rally that began last Thursday. To meet the strict definition of a follow-through…
It’ll be interesting to see if this week *finally* brings the big headline number that everyone and their dog has been calling for for at least the past few months. Of course that big day has long since been discounted into the market, and in fact we’re already on to discounting things like…
Where was the volume… The Naz didn’t even break 2 billion shares, the NY not even 1.5 billion shares??? On a 3% gap upside day off of a 3-day island, where lows were tested and held repeatedly??? Humm. And that mean old 20-day EMA is threatening… I dunno, smells too fishy for my likings. Kind of has that short-covering odor about it. You know, that unmistakable aroma that comes from a trader who just shorted a stock, only to see it gap up the next day, and proceed to rally all f-ing day long, never letting him realize his dream of covering “as soon as the market pulls back a little.” Yikes! Been there, done that! It’s a lesson we all have to learn, whether it be the hard way (with your own money) or the easy way (watching someone else get blown up). It’s that lesson that can send you home to mommy mutual fund or make you stronger. C’est la vie. Time for happy hour!
Oops… gap up on the open… set the day’s high before 10:00… cross the flat line a few times and give back 100% of the unimpressive 3-hour rally in the last 30 minutes… humm… not what the bulls want to see. About the only positive is the fact that yesterday’s low served as support and OBV (or use RSI, if you prefer) made a higher low (divergence). Problem is that late-day selling… Think some people are gonna have to get scared here… nothing like a cleansing capitulation to refresh!
That a risk premium has been factoring into the market since January 26th…. gulp. Well, that’s what happens after a year-long rally that pretty removed the “oh shit, another Iraq war” risk premium. And it just so happens that Jan. 26th was the day word got out that the Fed changed it’s policy stance and the smart money began distributing shares into the rush of mutual fund money… because it’s time to begin discounting a rise in interest rates and inflation. Naz getting some support at its 200-day moving average, but it’s still a good time to have some dry powder!