The Icing on an Over-Baked Cake ~ The Risk Averse Alert

Friday, May 29, 2009

The Icing on an Over-Baked Cake

Decidedly bearish, near-term and intermediate- ... with abundant technical evidence revealing growing underlying weakness ... today's futures-driven charge into close is seen as but icing on an over-baked cake: the sorry excuse for bullish trading that was the entire month of May 2009.


Starting with a low-volume surge covering about two-thirds of the entire month's gain (5.4.09) ... soon to follow was an active bailout at top (5.6.09 - 5.8.09) ... with the rest of the month spent twisting in the wind ... ending positive on notably low volume ... and relative strength and momentum weakening.

So, with major indexes ending on or near their best readings for the month (rather than going out negative, as I suggested possible the other day) recent insights anticipating buoyancy over the next couple months seem all the more well-placed.

However top set on May 8th still is thought significant. Trading since is seen beginning a retracement of gains made since March '09 bottom.

The better part of the NYSE Composite's anticipated turn lower, giving back, say, 38.2% of March - May gains, likely lies straight ahead...

NYSE McClellan

The market's current underlying technical condition seen from the perspective of the NYSE McClellan Oscillator (and Summation Index) bears striking similarity to this same time last year...

NYSE McClellan

The NYSE Summation Index, right now, is higher than where it stood at the market's peak in October 2007. I point this out because at the May 2008 peak the NYSE Summation Index likewise exceeded its October 2007 high. Knowing what followed, might this technical condition be seen as the face of optimism misplaced? Because, here it is in our midst again ... and this time consensus appears even more "positive" (certain, convinced, etc.) that, bottom is in.

Consider, too, what positive, sustained momentum has been registered (via McClellan Oscillator readings above 0) since November 2008 bottom, such as has lifted the Summation Index to this positive level well-beyond its October 2007 peak. Then, look how little the NYSE Composite has in fact recovered.

By this measure the stock market is in serious trouble.

Now regarding presently deteriorating momentum revealed by the Oscillator... Minor differences notwithstanding in the lead-up to this moment (now versus this same time last year) ... a period of serious selling pressure nevertheless (and still) appears imminent.

Yet by these minor differences, now versus last year, one also might suppose pending weakness will not presently lead the NYSE Composite to a new low (like happened last July). This view dovetails an outlook projecting a couple months of relatively buoyant trading ... the sort of thing leading to a growing conviction bottom is in (that gains from March '09 bottom simply are being "corrected").

Nevertheless, some indication of pending further weakness (intermediate-term) likewise should develop during this period of buoyancy in which the market is projected to sink (imminently) then get back up (going into August '09).


NASDAQ led the way higher off March '09 bottom, and has led the way, too, in the process of turning over. You see this most graphically via the RSI panel. Much like January's decline led to a reversal of COMP's RSI trend (from up to down), so too has been the result of NASDAQ's decline earlier this month.

Seeing how the earlier instance "set up" NASDAQ's February - March '09 decline, it's clear NASDAQ could soon find itself under concerted selling pressure.

My wonder here is what to expect, COMP v. NYA, in relation to an intermediate-term outlook forecasting capitulation...

Despite anticipating buoyancy over the next couple months, how might subsequent capitulation be telegraphed, becoming a greater likelihood, by selling straight ahead?

Might COMP correct 61.8% of its gains from March '09 bottom (whereas NYA corrects only 38.2%)? Remember, I was the one who, a month and a half ago, was pointing out how near COMP was its 200-day moving average, whereas NYA still was far below its 200-day. Yet this disparity was "repaired" (and in the process resulted in NYA leading COMP in its gain off March '09 bottom!).

So, some kind of notable performance disparity certainly is not outside the realm of possibility looking down, right now, from here. Indeed, with an eye toward the market's ultimate capitulation sometime over the next year or so, better expect added evidence over the next couple months that, despite prospective, relative buoyancy, underlying weakness continues to build.

(Coming this weekend: "Bullish the U.S. Dollar is Bearish Global Equities and I AM")

Fast Money
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