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Today's Market WrapUp 08.02.2007 Mon Tue Wed Thu Fri Goldberg Archive A
Wealth of Completed Reversal Patterns Paint Bearish Picture
From the beginning of the bull market there have been both calm and dramatic corrections, yet the market continued to march higher. Now with the market in a sharp correction, it is relevant to ask whether this correction is instead, an important top. There are two aspects to this market that suggest that it might be:
Tonight these completed reversals are illustrated as will be some key important charts whose near term behavior will be critical in establishing whether the market will move into new high ground or whether an important top has been seen. Below is a three year weekly chart of the Regional bank holders ETF. Unlike previous corrections, during the last year the ETF has formed and has now completed a reversal pattern. The intermediate term trend is now down. While the oversold shares are likely to move back to the neckline (blue horizontal line) at 150, that would be an appropriate entry point to enter the ETF from the short side.
Similarly Countywide (CFC) is a media-followed favorite. You can be sure that there will be analyst upgrades galore as Wall Street will get out there and support one of its favorite brothers. It will be a key to the overall market whether the spin machine will be able to bring this stock back to life. A rally back to the neckline on multiple analyst upgrades would present a great entry point for bearish positions.
Even though this market has had corrections before, entire sectors were not completely ravished as they have been recently, and this suggests that what we have is more than just a correction. Note the action of the private mortgage insurance companies such as Magic Investment Corporation. No magic here. Other companies in this sector are PMI Corp (PMI), and Radian Corp. (RDN). While a bounce is likely, it is safe to say that the trend is down for these companies.
On the topic of financials, the market is beginning to price the risk into corporate debt versus the risk free government debt. Accordingly, although the bond market has rallied, high grade corporate debt has not and this is clearly illustrated in the chart of high grade corporate bond fund below. Technically, this ETF has completed a head and shoulders reversal pattern.
There are two ways the price of this ETF may continue to go down. First, if the market continues to discount higher interest rate spreads to discount the difference between corporate and government bond risk. Second, if the overbought bond market sells off. While previously completed reversal patterns were scarce in the consumer sector, now they are plentiful. Consider the following charts: Kohls - Reversal pattern completed:
Dillards – Reversal pattern completed (unless a slew of analyst upgrades can help form the right shoulder of a wide and tall head-and-shoulders reversal).
Nordstrom – Reversal pattern completed (rallied on analyst upgrades, but neckline is intact.)
Sears – Reversal pattern completed. Note the potential for a rally back to the previous neckline (as shown) which would thereby form the right shoulder of a larger and taller head-and-shoulders reversal.
J.C. Penney – Reversal pattern completed.
Panera Bread Co. – Reversal pattern – a tall head-and-shoulders pattern – completed.
Starbucks – Reversal pattern – a double top – completed.
Motorola – Reversal pattern completed. (Where’s Ichan?)
In spite of the numerous reversal patterns completed, the all important Cisco Systems is braving the market’s downtrend and its action over the next few weeks may tell us volumes about whether we have seen a market top or whether there will be more upside. Cisco has traced a long term cup-with-handle pattern which dates back to 2003. As illustrated in the chart below, Cisco has tried to break out of the handle portion just when the recent market correction began. Rather than fail along with the overall market, Cisco has stayed relatively strong. It reports its quarterly earnings on Tuesday, and this should be a long term Cisco moment of truth. (Excessively good or bad news could have a profound effect on the overall disposition of the stock market.)
Finally, another key long term chart with implications for the stock market is that of the Russell 2000, a small capitalization stock index. A three year old trendline is now being threatened. It is important to note that the uptrend is still alive until the trendline is decisively broken.
Today’s Market The Dow rose an additional 100 points on top of yesterday’s 150 point gain. Yesterday was the initial “rally attempt” according to Investors Business Daily’s much followed market strategy method. Today’s gains, although significant, occurred just one day after the rally attempt and with less trading volume than yesterday’s suggesting that a “follow through day” did not occur today. Nothing today has changed anything about the analysis presented above. On this rally day, both Cisco was strong and the trendline on the Russell 2000 remained intact. Panera rallied strongly today, where a strong market would likely take the stock back to its neckline. One more chart of interest is that of American Airlines (AMR). This stock was a villain of the last bear market and a favorite of the recent bull market, although recently it fell out of favor. Below you see the action following an apparent top at 40 made in January of ‘07. After a correction, the stock has been bouncing in a relatively narrow range between 25 and 29. Yesterday it appeared that the stock broke down out of the range. But it was saved this morning on some good news and the stock is now hovering just below its former range. In this bull market such stocks have routinely reclaimed apparent breakdowns with fast and tradable rallies to the upside. A failure of this stock to reclaim its previous range would be one piece of evidence to suggest that the character of this market has changed from bullish to bearish.
Have a great evening. Martin Goldberg Copyright © 2007 All rights reserved. CONTACT
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