No Surprise

• July 5, 2002
• Dan Chesler

Readers of

my daily service were not surprised by
Friday’s rally, as I had warned of a possible exhaustion in selling pressure,
and advised daytraders to trade from the long side. NYSE down volume vs. up
volume ratios reached levels on Tuesday (8:1) which, in the past, have been
associated with at least temporary reversals. We
also saw a pair of back-to-back closing TRIN readings over 2 this week. 
Some have questioned the validity of this
indicator in recent years due to the large and growing number of bond funds and
ADRs in the NYSE advance-decline data. Personally, I feel the TRIN still has
value when viewed in its proper context.

Sentiment wise, the VIX rose three straight days this week. While still not at
its September 2001 peak, on Wednesday the VIX managed to close at its highest
level in eight months. Lastly, a slight divergence between the closing value of
the S&P 500 index and the NYSE TICK has developed. A similar divergence appeared
at the September 2001 low. 

 

 

 

 

For the bulls,
today’s constructive price action must be followed by a successful retest of the
July 3 lows, and/or significant upticks in breadth and price momentum. After
today, it will also be necessary to discern between short-term overbought
conditions in a downtrend (which normally lead to a resumption of the
downtrend), and short-term overbought conditions at the early stages of a new
up-leg (which must be ignored). Again, I’ll try to help guide you through these
conflicting signals.

Looking at sectors,
the Biotech HOLDRs
(
BBH |
Quote |
Chart |
News |
PowerRating) shows a classic
triple divergence vs. the 5/35 MACD momentum oscillator.  This is a common
bottoming pattern after an extended trend move. (See chart below.)  I’ve
included a weekly chart of the Japan iShares as an ideal example of how this
pattern has worked in other markets in the past. 

 

 

 

I am not jumping on
the bull bandwagon. We still have a lot to be worried about in this market
including the primary trend, higher-time frame momentum and multi-month
distribution patterns. However, in the short-term, I am more confident to nibble
from the long side than I was a week ago. Downside risk should be strictly
defined by the July 3 lows. For those looking to nibble, ETFs are the preferred
instrument, such as the
(
QQQ |
Quote |
Chart |
News |
PowerRating),
(
BBH |
Quote |
Chart |
News |
PowerRating), and
(
SMH |
Quote |
Chart |
News |
PowerRating).

Have a great
weekend.

Dan Chesler