Monday, November 24, 2008

Where To Now?

Is the 2008 Bear Market Over? Is it the low or just a low? Technically speaking, the market performance last week satisfied both the bulls and the bears alike. That should provide some information in of itself. You will notice that I frequently view the market through a technician's lens. I believe it is absolutely necessary to do so in a bear market since the previous price performance is the only structure establishing reference points for traders. The charts do not lie and the charts provide guideposts. They also give you a visual map as to where the program trading desks will likely take the market. A majority of the markets liquidity is provided by program trading (i.e. hedge funds). These are algorithmic based systems that buy and sell the market on autopilot over and over again. The reference information that they trade off of are visually presented in charts. Bull markets create new buying and selling data as they go up. They are in fact building the infrastructure for the next bear market. In bull markets, charts are much less meaningful since the information has very little context. People just buy high and sell higher.

Getting back to technician speak. The bears point to the violation of the 2002 bear market low (closing below 768) as indication we are in for substantial weakness over a considerable length of time. Some very respected technicians are now calling for the market to fall to the 600's on the S&P in the short term and 400's over the course of this recession/depression. Here is arguably one of the best, Louise Yamada.

However, those lows were quickly recaptured Friday afternoon and seem to be continuing this morning. Market technicians could now point to a potential long term double bottom or something called a Wyckoff Spring as illustrated on The Big Picture's site.

"A Wyckoff Spring occurs when a market average (or stock) falls below its trading range, and makes a new “panic low” — and then “springs” back into its previous range.Its a relatively rare situation, one that is usaully associated with a sell off. That is a rather apt description of the entire week’s action."

This could very well be just another oversold bounce that we have seen again and again throughout the course of this crash. Market emotions tend to be binary and incapable of evaluating grey areas. I would argue, the only way this market get's a foothold, is to have a substantial rally over the short term with consolidation in a much tighter range. If the market languishes down in the 800's for too long or jumps up and down in a 200 point range (S&P) it will be very hard to recover from technically and therefore fundamentally.

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