The downside correction yesterday was a bit steeper than I thought and that is a bit troubling, since some price patterns and price actions, which I have learned to recognize over the years, are giving alerts about the upside stability of this market.
That also is, as I learned, a basic problem of Mercury retrograde - normal patterns do not work as well for a little while. Some indicators are deeply on the oversold side. Just to give one example, on Friday, the ISEE had a 66 and the 10th day, MA is dropped below 100 at 94, which marks a low for a few weeks usually. All the classic daily momentum indicators are oversold too.
Contradicting are the monthly charts, which create sell signals and are far from being oversold. As I stated in an earlier post, this is not a real low by many means. We had a mini capitulation but not the real one. Even by common sense you can figure that out. Markets are far from any discount levels, the SPX with single digit PE valuations are 50% away, long only funds are cautious but not in a panic and the pension funds and insurers still hold high level of equity - in 2003 they sold out. Coming back to current price action, the current down wave is, in many respects, in the middle of unfolding. Since all markets are correlating we have conflicting signals. The aspects that helped the bull market are back on - a falling Dollar, hard commodities rise, which includes oil.
The NDX closed the week lower still in downside momentum and we might test the lows once again before the upside consolidation takes on. This is and was not only a sucker rally, it was government manipulation, which is even worse - they tried to produce a desperate circuit breaker.
I’m going to stick to my guns this week and next have basically an upside bias, since the effect of the final bailout plan with window dressing will bear some positive momentum short-term. Going into earnings season, Q3 looks technically ugly and we will go lower.