Now Come the Pause That Refreshes ~ The Risk Averse Alert

Wednesday, March 18, 2009

Now Come the Pause That Refreshes

Well, what do you make of today's high-volume, upside burst — the most active day of trading since the market commenced its launch higher on March 10th?

Think back to yesterday's exercise in imagination...

Did you take advantage of today's good news (the sound of helicopters coming from the direction of the Monetarist Monkey Zoo) and unload some of your winning positions to apes (like Cramer) who have been waiting for this banana from the Federal Reserve for some time now? Of course you did! That's why volume surged.


So, here we are again in the vicinity of the 50-day moving average...

The position of each index in relation to this moving average bodes well for the near future. This time in the advance to the 50-day NASDAQ actually is leading (unlike mid-December '08 when, under similar lead-up circumstances, NASDAQ actually lagged ... a red flag I did not notice until this very night ... unfortunately).

Curiously, though, NASDAQ is well-short of its '09 downtrend line, whereas the NYSE Composite has risen to touch its same line. What is this saying? How about that, wild animal spirits have yet to bid the market higher, suggesting there's a lot of upside remaining.

Look at that solidly rising RSI firmly charging higher to the buy side of the balance. Sweet! First, it's confirming expectations (Elliott Wave-based) for a big move higher still. More immediately, though (much like MACD), it shows there is an open window for some healthy profit-taking over coming days. This is much the same message presented yesterday in the chart of the NYSE Bullish Percent Index (whose condition only improved today, further confirming positive expectations).

NYSE 5-min
NASDAQ 5-min

As you can see, whenever RSI registers a buy-side extreme pressure can be expected to develop subsequently. Early on in the market's present move higher — just following initial launch — selling pressure was of little consequence. Hours of choppy trading still had an upward bias. You might call this a picture of "pent-up demand," given what followed (isn't hindsight wonderful?).

So, what might we expect following today's ape-driven charge to another buy-side RSI extreme?

Well, RSI's steep dive this afternoon to buy-sell balance (i.e. in the vicinity of 50) was a bit more pronounced than was last week's. And how about that intra-day price gap lower (occurring this afternoon in both the NYSE and NASDAQ Composite indexes)? What might these subtleties be saying about immediate prospects?

They're saying, "Expect pressure."

Go over to StockCharts and take a look at the various underlying technical measures I typically present here. What are they saying?

First, all is well. There's genuine interest on the long side of the trade. Yet underlying conditions also suggest a healthy pullback — a consolidation of gains — might be in order.

So, near-term, expect pressure to develop in anticipation of "the pause that refreshes" just prior to the explosion higher I suspect is days from unfolding.

Fast Money
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Bad with my money, great with other peoples!
(I am based in London, England so excuse the weird times you get this email!)
Giant Investments
T: 01273 224002