|
Summary for Week Ending 20th August 2004
Although the Oil market again this week showed us that there is still no such thing as 'Too High', the markets decided that a rally was a good thing to have. After the past months of bearishness, we saw an apparently solid rally this week, which as mentioned last week, was not unexpected, although the dimension of the rally was certainly a surprise. If you assume that a rise in Oil leads to higher manufacturing and transportation costs which eventually will impact upon profits, its difficult to understand the markets when they rally in the face of this. Perhaps George Soros was right when he said "All markets are wrong!"
Looking at the week we saw the market take off out the the blocks on Monday and this set the tone for the week. Even the over-blown float of Google, coupled with the sky high price of Oil failed to faze participants, although its difficult not to think that some of the new longs may be playing with fire. The prime reason for this is that the market is in definite bear mode, and a strong rally on its own, does not give us enough information to say that the bear move is over, in actual fact the market has to do a lot before we can comfortably say this. Looking at this weeks chart we can see that the movement for the week was spectacular in comparison to what we have been seeing over the past 2-3 months. An indicator is the dimension of the rally, being 40 points so far, which marks the largest rally in this current decline wave and follows on from the false break we experienced last week.
Taking this point a little further.. Last week I mentioned that we had a false break on the cards due to a weak performance in the final push down. This weeks performance has confirmed this observation.We had a 1-2 day counter trend rally which took 3 days to consume to the downside, giving us the false break. In these situations, what we have is a coiled spring that has reached its limit, and all energy to the downside is expended, which is why the reaction is always so strong, as the previously opposing force (in this case Bullish sentiment), suddenly has no friction and the corresponding rally then feeds upon itself. This situation lasts until the pent up bullish sentiment runs out of energy and the bearish players, be they profit takers or just simply bears, again become a force and we see the first corrective pattern. In the case of the S&P 500, we are currently in a sideways pattern, so there is too much that has to happen over the next few months to break out of this and there is little point in canvassing the various options at this point in time, suffice to say that we are in a bear market, experiencing a bullish rally on the back of a false break.
In the coming week, I would expect the rally of this week to dissipate, and a correction to come in. The correction, when it occurs will be worth watching as I will be looking for depth of correction and time taken to give a guide as to the strength of this movement.
|
