Confirmation Day? No

A few people asked if yesterday’s reversal counts as the previously discussed Confirmation Day. The short answer is no: It requires a much bigger rise on significantly stronger volume.

The longer answer involves the psychology behind the shift from selloff to rally: What’s needed is a high degree of conviction that the worst is behind us by institutional shareholders. The confirm day is evidence that a strong appetite for equities has been stimulated. This may be accompanied by a fear of being "left behind" as the market rallies. The evidence for this is very strong volume, big up/down volume, strong A/D. 

By that measure, the jury is still out. We traded down to year-to-date lows on low volume, saw the Arms Index spike up, which generated a few buy programs and a reflexive rally on the Fed minutes (which in and of themselves were hardly Bullish). 

The reversal yesterday would have been far more significant if it was at the end of a long downtrend. That might have revealed a possible shift in psychology. Instead, it came after two weeks of sideways action. 

In my opinion, the very widespread search for a bottom hardly shows the extreme levels of fear needed to make a more reliable low. Perhaps we run for a few days, but  I hardly see more than that. I am watching 10,550 on the Dow, 1192 on the SPX, 621 on the Russel 2000, and  2020 on the Nasdaq.  Also worrisome is the breakdown in the  Transports since early March, despite a very hefty pullback in Oil. Watch 3720 on the index.


UPDATE:  April 13, 2005 9:44am

A friend who works on an Institutional Sales desk (and "liked your Confirmation Day note") emails me the following  from Stan Weinstein:

"Also, it is important to
note, the S&P 500 (.SPX) held its 150
moving average @ 1170, and put in a nice reversal day, closing at basically the
high for the session (1187.76). Given this activity, we would expect a couple of
days of positive trading from this point, which might make for some profit
taking or new shorting opportunities. It is likely that this rally will prove to be
short lived

However in order for this rally to turn into
something more than just a few day bounce we would need the following levels to
be overcome on a closing basis: DOW 10560, S&P 500 1192, COMP 2022, and .NDX

That’s pretty consistent with my own views. That’s not surprising, considering that Weinstein’s book, Secrets For Profiting in Bull and Bear Markets, was a seminal book in the develpoment of my own quant/technical market analysis. The key, according to Weinstein, is "stage analysis" — using charts to determine where a market/sector/stock is
in its cycle: going up, topping, declining, or bottoming out. I haven’t read it in a long while, but it was a classic.

On the other hand, I greatly respect Dick Arms’ work. He is more bullish than I am — at least for a short term pop up to Dow 10,800. 

"Going into Friday’s market last week, we had seen four up days, but the rally
looked suspect because of the low volume and the still-overbought Arms Index
numbers. But the selling on Friday and Monday produced high-enough daily Arms
Index values to push the 10-day moving average to its most oversold level in
about two months.

Tuesday, the markets staged a very impressive one-day reversal as they
tested and bounced off the January lows again. Volume was a bit better on the
reversal. The Arms Index numbers remain oversold for the 10-day moving average.
This looks as though it may be the beginning of a rally.

On a cyclical basis, as I showed last week, a low is due in this
vicinity. This may be the start of a turn to the upside.
The cycles recently have had a wavelength of about two months, trough to
trough, and the moves in each direction have been in the neighborhood of 300 to
400 Dow points. On that basis we might project a rise to around 10,800
over the next few weeks.

The real key will be a breaking of last
week’s highs on good volume. I think, though, the likelihood is good enough to
justify some buying in here. We have ridden the whole decline down, resisting
the impulse, until now, to buy. I now am more aggressive than I have been in
well over a month."

As always, we strive to be both "Fair and Balanced" (although some have accused us of being fairly unbalanced).  Your mileage may vary . . .


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What's been said:

Discussions found on the web:
  1. Chris commented on Apr 13

    Re: “Stage analysis”

    Is the market in the topping stage?

  2. Mike Branco commented on Apr 13

    Most folks agree the VIX is not an entirely useful timing tool, but it can still be useful as a measure of sentiment – it shows what traders are actually doing w/ their money. Wrap the VXN in bollinger bands (width approx 1.7) and notice when it closes outside the bands. Not useful all by itself, but instructive when those around you were talking about “fear” yesterday a.m. – it sure didn’t look like a fearful market to me.

  3. jim rapp commented on Apr 13

    O’Neill called yesterday a 1.8% intraday reversal move with lingering questions as to sustainability.

    Today was an down inside day on slightly higher volume than yesterday. Investors and fund managers looking forward to second half earnings dropoff where current values won’t be supported.

    Could the market ignore the bearish sentiment and just start its decline from here?

  4. Jim Rapp commented on Apr 15

    This is the kind of action I was asking about. I don’t think bulls can always climb a wall of worry if there are no handholds.

    Tommorrow we open up with the IBM disappointment and possible restructuring to follow. After that we find out if we got enough indirect participation in the treasury auction…. which if insufficient could cream the dollar, bonds and equities. If we get insufficient foreign central bank bids or if it comes from the Carribbean we could be at 9,000 quicker than anyone might think. If that happens, buy gold….. lots of it.

  5. anon commented on Apr 15

    I find it interesting that your site has become the “chat room” for public participation on the direction of the market. While I would agree that your readers are more informed and intelligent than the usual chat room buffoons, a mass one-sided opinion (in this case bearishness) driven by personal trading positions(i would assume) should be considered informative and possibly biased. Psychology is most important here, and coupling these opinions with the AAII bull/bear survey overwhelmingly bearish(a contrary indicator), we will see how deep this correction is. No doubt, current technical conditions look troublesome, but how troublesome? Only thinking out loud.

  6. Mike Branco commented on Apr 15

    Per my comments further above, and in addition to several other sentiment indicators I use, this morning is the first sign of REAL bearishness since last Oct – back then the fear was of revisiting the Aug lows following the election. All previous reports of bearish sentiment since then didn’t even register on my indicators, fwiw.

  7. Jim Rapp commented on Apr 15

    Anon. This article is about market direction and comments can only be about market direction, as were yours. You say its all about sentiment or psychology and often it is short run. (A quick bounce can erase the sentiment imbalance and the deeper sentiment will prevail). The article said it was all about cycles or stages and sometimes it is but often these can only be understood through the rear view mirror. Who really knows if this is a correction, an intermediate correction or a bear?

    Clearly the Stage Analysis and Cycles indicating a bottom “Here” 10,525 didn’t work too well. Clearly the market didn’t go up anywhere near 10,800. Clearly the market has tanked depsite a put/call ratio of 1 and a highly bearish sentiment.

    My question was whether the markets couldn’t ignore the bearish sentiment and sink despite it? The market did exactly what everyone here didn’t think it would do and sank profoundly.

    Earnings came in weak and projections look weaker still. Current sky high valuations can’t be sustained with the earnings outlook. Money managers are raising cash to minimize losses. Later, funds may experience outflows and might be forced to sell. That could continue with some bounces until it is over-done and earnings justify valuations.

    ONiell’s CanSlim is just now about to tell us that it is time to bail. Note how far we are into this decline before we get this indication.

    Some times you have to stand back from all the cycles, stages, sentiments and Canslims and just use some peripheral vision.

    Sentiment measures the amount of agreement of investors’ bullishness or bearishness. It cannot measure the conviction or vulnerability of their current sentiment and that unknown is the weakness of the contrary indication. Some sentiment intensities just make investors optimistic or pessimistic while others make them buy or sell some stock while others make them bet the farm or sell everything. You could have two discrete circumstances with the same bearish sentiment readings and have ENTIRELY different outcomes because the unmeasurable conviction was profoundly different.

    Just think aloud Anon.

  8. touche commented on Apr 16

    The market fundamentals haven’t been as bad as they are today for at least half a century. The US economy is just beginning to tank and foreign markets will be rattled by the resulting tsunami. For the time being, I’d forget technical analysis and scramble to higher ground.

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