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Summary for Week Ending 30th October 2004
What a difference a week makes. In the past week we saw the markets react to an ever so slight softening in the Oil price and this reaction has translated into the strongest rally we have seen since March. Throw into the mix a new Osama video ( not of the music variety) and the coming weeks are starting to look very interesting indeed.
Last week I was discussing the fact that this decline has been less that impressive and very hesitant in nature. Whilst on Monday the market did push down to a new low this proved only to be a false break at this juncture as the market rallied strongly on Tuesday and this sentiment and momentum was carried through for the rest of the week where we finally saw the market take a little rest, although it did also manage a new high. It should also be noted that the day was less than impressive than the previous 3days movements. In all, the market managed to rise almost 4% for the week which is a huge number, espec ially considering that this all came within a 4 day period. It should also be noted that volume over this period was also strong so there was plenty of support for the movement, which goes to show that there is still a considerable amount of positive sentiment still underlying the current market, and participants are keen to find a reason, any reason with which to attach a bullish flag.
If we look closer at the S&P chart we can see that the market has cleared all the swings that made up the movement Oct 7-25. It should also be noted that the market took 4 trading days to cover what took 11 trading days to produce, so we can see where the path of least resistance lies. If the rally is to continue I would expect to see the high of Oct 7 to be taken out quickly and then followed by a brief period of consolidation, before the trend would continue. Since we saw the decline end with a false break this is indicative of strength in the opposing direction and it could be said that a considerable amount of this energy was expended this week. We should also look at the fact than the market has been tracking sideways for 234 days so there is also a lot of pent up energy that needs to be expended as well. Also, just as an aside, we can also see the makings of a 'head and shoulders' formation, but these are usually present at the end of an extended movement, but still worth keeping this in the back pocket just in case.
So the question is:Has the current pattern of decline ended and are we in for a new period of bullishness ?
As with any question where we peer into the white space on the hard right edge, it has to be balanced with what we can see. So far we have seen a tremendous amount of bullishness and this cannot go on forever without some consolidation. We could also count the 4 day rally as purely counter trend, but as I said last week, if things are bearish then the resultant rally should be shallow. A rally taking over 75% is not shallow. From my perspective, there are three external subjects that may have a bearing on the future. The upcoming election, the price of Oil, and the reaction to the latest Osama video. The last item is a wild card as the market may ignore this completely as it has done in the past.
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