The Air Smells of Dead Cats Bouncing
in a Mushy Swamp
By Joe Duarte on July 27, 2017
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If I was crazy for metaphors, I would say that trading the current
stock market is akin to being knee deep in a stinky, boggy swamp riddled
with snakes and alligators.
Let’s face it whether you’re bullish or bearish, this market stinks.
That’s because even though the charts suggest that lower prices are in
the offing, the robots keep buying the dips and the central banks continue
to put money to work in order to keep stock prices buoyant. This type of
fantasy island trading, where the perpetrators buy every dip and bid prices
higher with no regard to what’s happening in the economy or the world,
is nearly impossible to trade unless you slap on your own pair of rose
colored glasses and drink the poisoned fruit punch. Yeah, we trade the
trend. And yeah, we take what they give us. But right now, it’s hard to
justify taking any major risks given the very mushy nature of the trading
action, regardless of prices.
Perhaps the saddest aspect of the current situation is that the bots
and the central banks may yet again be successful in keeping stocks from
having a scary ten percent or worse pullback. But, if this was a market
based on reality, the bounce we saw over the last couple of days would
qualify as a dead cat bounce – a weak and very unconvincing rise in prices
which is eventually followed by a move toward significantly lower prices.
And if history is any guide, reality will eventually set in.
Market Breadth Tries to Recover
The NYSE Advance Decline line does not want to die; at least not as of
the end of trading on August 25. But it’s hard to know which way things
are going to break, just yet. For one thing neither the MACD or the ROC
have given the all clear, as both momentum indicators are signaling that
although a tradable bottom may have been made, NYAD still has some work
Large Caps Are Still Short of Breath
If the S & P 500 (SPX) was a patient who had recently had a heart
attack, the treating doctor would not be discharging it from the I.C.U.
That’s because the patient – the market - is still having shortness of
breath and chest pain with little exertion. The telltale sign of this state
of less than optimal health is the fact that the index has not moved above
its 20 or 50 day moving average convincingly after the recent drubbing,
while trading volume slowed to a crawl as the market tried to bounce at
And there are more reasons to stand aside in the short
term. For one, buyers are few and hard to find. This is well illustrated
by the Accumulation Distribution Line (ADI) and the On Balance Volume (OBV)
indicators, which are both in downward trends. This posture of both indicators
is a sign that few investors are willing to take a chance on buying into
this market and that those that are taking a chance are lukewarm at best.
This lack of commitment is confirmed the ROC indicator, which measures
momentum, as it has barely come off its recent bottom despite Friday’s
Tech Stocks Look Queasy
To quote former FBI director, Jim Comey; the Nasdaq 100 index (NDX) has
a “queasy” look to it. Not only is the index tracing a lower high and lower
high chart pattern; the Bollinger Bands (green lines above and below prices)
are also pointing down. These self adjusting channels are excellent at
confirming the dominant trend in the market. When you add their current
appearance to the negative message of the ROC indicator - little upward
momentum, On Balance Volume–more sellers than buyers, and the Accumulation
Distribution line (ADI), which is starting to roll over confirming the
OBV, it’s difficult to justify buying into the big tech stocks at this
Midcaps Hang On to Up Trend by Fragile Thread
The midcap area of the market was brutalized during the past few weeks,
with the S & P Midcap 400 Index (MID) giving back 5% since topping
out at the end of July. So, its nearly 0.5 percent jump on Friday was not
surprising given its recently oversold levels. Yet, MID is now struggling
to stay in a long term up trend as it fights to move back above the 200-day
moving average convincingly.
And unless something changes, it looks as if the odds of success are
no better than even. Consider the downward slope of the ADI and the OBV
indicators on the MID which look worse than those for SPX and NDX. Indeed,
the selling does not look to be over in the midcaps by any measure.
Direction of Prices Remains Unclear
I’ll put it this way. This market is all wrong and gives me the willies
– did Comey say that too? But I’ve seen some strange things in my time, and
these are not normal times, so anything is possible. Therefore, even though
it looks and feels as if this market should be crashing, it would not be
out of the realm of the current altered reality that we may see a new up
leg storm out of the gate on Monday. Nevertheless, my gut and the technical
indicators, tell me the bulls are running out of time. So if we’re going
to have a meaningful rally, we should know within days. That’s because volume
will pick up and buyers will once again show a feeling of urgency as they
put their money to work. If this is what happens, the technical indicators
which are very flaccid at the moment (ADI, ROC, and OBV) – will point the
way higher. But, until I see a real improvement in the market’s measures
of momentum and some clear and unequivable buying conviction, I will be waiting
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