Putting The Buggy Before The Horse
David Yu
April 13, 2008
It was quite a busy week, and I only had time to
put up fragments of my analyses during the week. Now let me try to
defrag - to organize and summarize - my commentaries.
On 4/3/2008, I'd expressed concern that my CMB
(Composite Market Breadth) Volatility Index persisted at an
unprecedented high level even though both the stock price based and the
option price based volatility (VIX) indices had been declining - see my
April 3- April 4
Market
Breadth Divergence editorial for more details.
Blue circles on Chart 1 indicates peaks of
the CMB Volatility Index correspond to lows of the market. The market
began to rise when the CMB Volatility began to fall. This is because
market dislikes volatility. The CMB Volatility normally tops out soon
after it moves above 0.50. This is when short positions should be
covered and long positions should be established. And, that's what had
happened in mid March. The market hit bottom, bounced right back, and
gained more than 7% through the first week of April. However, the CMB
Volatility had also surged past the mid-March high during this same
period (red arrows on Chart 1). That's clearly not a bullish
sign.
One reason the market continued to fall since mid
December is that the CMB Volatility had never declined below 0.40 (blue
rectangular box). In order for the market to feel comfortable enough to
begin a new uptrend, this CMB Volatility will have to begin to trend
lower, not just zigzagging sideways as it did within the blue
rectangular, or making new highs as it did recently.
Chart 1
Another disappointing
technical development of late is the market's inability to hold on to
its gains in the afternoon sessions. That's depicted on most charts with
sprinkle of High Wave, Spinning Top, or Doji candlestick patterns
following the big rally on the 1st day of April. It's also manifested on
my Intraday Breadth Performance chart, which, by all means, measures
intraday market breadth differentials (Chart 2 below).
On Friday, 4/4/2008, the
Nasdaq Intraday Breadth Performance violated its 3/12/2008 low (red
circle on Chart 2). It then went on to drop below zero on the
very next trading session, Monday, 4/7/2008.
Chart 2
The late session decay can
also be seen on the deterioration of the CLV (Close Value Location),
which measures closing price's relationship to the trading range.
Chart 3 below shows the decline of the CLV of the Nasdaq 100 PowerShares (QQQQ)
after its March 26 peak. And, just like the Nasdaq Intraday Breadth
Performance, this, too, had just dipped into the negative territory.
Chart 3
Despite these market breadth
corrosions, the market went on to one new intraday high after another
during the first week of April. This speculative buildup was likely the
contributing factor to the selloff on Friday, 4/11/2008, notwithstanding
GE's "surprised" earnings report. And, strictly from the
technical perspective, speculation is likely stemmed
from the development of bullish chart patterns since April 1.
The 3.59% one-day surge of the
S&P 500 on April 1 and the subsequent advance to the April 7 intraday
high had completed the base of an inverted Head and Shoulders bottom
(see Chart 4 below). And, during the first week of April, with
investors' sentiment at the highest level since December, it's not that
hard to understand why traders would put the buggy before the horse in
hopes of earning higher profits. Of course, what comes with higher
profit is higher risk.
For a Head and Shoulders
reversal to take place, the price must break through the Neckline with
rising volume. In another word, the S&P 500 must break above the 1390
resistance. It hasn't happened yet. However, if and when it
happens, the S&P 500 could move all the way up to challenge late
December's resistance at around 1500.
Chart 4
Apple (AAPL), the heaviest
weighted component of the Nasdaq 100, has also had its own bullish
reversal pattern going. Chart 5 below shows Apple's Cup and
Handle pattern. The round bottom had completed the Cup portion of the
pattern. And the bullish Flag formation (double red lines) is in the
process of c0mpleting the Handle, provided that the share price does not
fall too much below $145, which is 1/3 retracement of Apple's advance
from the bottom.
But, this, too, has yet to be
completed unless Apple breaks above $160 with rising volume.
Coincidentally, if and when it does break through, it could also advance
all the way to challenge late December's resistance, just like the
S&P 500. Coincidence, however, does not make it anymore probable.
Chart 5
The market has to resolve all
these latest statistical variances before it can move on. It's a risky
business, albeit profitable at times, getting too much ahead of the
curve trying to maximize the gains.
www.chartmentary.com
email: dyuguard-2@yahoo.com
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