Summary for Week Ending 8th October 2005
Last week I hinted at the trend line support being taken out, but I never expected the decline to be so savage. Following from the big day out to the upside we saw the previous week, we compensated this week, with 3 big days out, this time to the downside.
On last weeks chart I highlighted the likely point for the market to find support should the trend line break down. This was based upon a range equality model which needed to be adjusted after we saw the market make another crawl upwards on Monday. I said last week that the market would have to trade strongly to the upside to shake off the bearish mood and what we saw on Monday was a warning of what was to come. On Monday we had a small outside reversal day which obviously soaked up the last vestige of support that was about and we watched the next 3 days as the market sunk with a passion. The range equality line was sliced through as was the 50% primary support level and we saw the market finally come to rest at the point of obvious support. Friday saw a weak inside day, and looking at the previous three days, an inside day was probably the best that could be mustered.
Looking ahead, the greatest danger is the current level of support. This is an 'obvious' level and as such these are prone to be broken. If we see some strength come in early this week, I would expect this to dissipate early and at best put in a 3 day rally. If this level is to hold, then I would expect this line of support to be re-tested and if it holds, then the market should fly upwards. If it doesn't then its a matter of looking for the next areas of support for the market. Also, watch volume closely. The mid week volume as the market slide was up about 25-33% on the average but not at a level I would consider to be capitulation. This is subjective but I would be looking for volume to be at a washout level if its capitulation.
Looking again from a fundamental perspective, if the market is to take a gallop forwards, then the specter of Oil has to be removed. A gentle slide in energy prices is not going to do it and a swift decline in price for OIl is what is needed to give everyone hope that the Oil crisis is over ( at least for a while) If we do not see this, then I can see a reason for markets to rise strongly when severe external financial pressures are being applied.
Looking at the coming week, I would expect the market to play around a little above the current line of support but I do expect it to be re-tested. If it breaks to a new low always beware the false break, so watch volume closely.
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