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Summary for Week Ending 9th October 2004
In the past two weeks we have witnessed not shortage of dramatic movements in the index. It also have provided a valuable lesson on using other markets to provide correlated support for a scenario. On the whole, such correlations rarely, if ever exist, and the recent run with the Oil market and its supposed direct influence on the Stock market has taken some surprise turns. It would appear the when the market is declining it is because of the rising Oil price and when it rallies strongly, it is due to 'other' factors and the price of Oil is discounted. If we look at the rally from the 28th Sept, this was done against a strongly rising Oil price. The last 2 days of this week where we have seen steep declines, has been put down to 'Oil Jitters', which only proves the point that a supposed correlated market is worth watching, but don't bet the ranch on it.
Looking more closely at the previous 2 weeks, we can see that the original scenario I painted was working out just fine..until Friday 1st October. This rally took me by surprise as I was certainly not expecting the market to be able to push that hard that fast in its current state, and so the scenario painted the previous week was well and truly in the bin. It did however pose a problem in constructing a new scenario on the back of that rally. When markets move that fast, they have to stop, just as suddenly as they start due to a rapid decline in energy (money) available to keep it bubbling along. We saw this energy dissipate on the following Monday and Tuesday and the expected congestion came in. What has also been a surprise was the depth of correction following the move to new highs, and we have seen over 50% taken of the initial rally and this has occurred in 2 days following a rally that took 6 days to accumulate. As it stands at the moment, we have a weak bullish pattern, with the market cutting deeply into the previous swing and it is the rally from this decline that should provide the market direction for the next month or so. If we see the market rally back to new highs within the timeframe of the decline + or - a day or two the the market could be described to be in a strong position and we could expect the rally to continue. If the next rally falters then we are in a weakened state, and the dimensions of the decline will be dependent upon the 'shape' of the pattern. If the pattern is weak, we can obviously expect a strong decline.
The Time signal we received on the 21st Sept has since been destroyed as a time marker, however the overall shape of the market is not strong. The previous decline was 30 points and this is now the benchmark for weakness. The decline of Thursday and Friday is so far 22 points, so any break below 1112 should see a further signal that the change in trend is upon us. If the 30 point range holds, then we know that the market appears to be stronger than it looks
Looking at the shape of the market since the March high, we can see that the S&P has put in 2 confirmed lower highs
and a third is still in play. Since March the market has been drifting sadly and only minor rallies and declines have occured...so far. Should this 3rd movement fail to go to new highs, that is, clear at least one of the lower swing highs then we will have a very bearish pattern to play.
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