Positives and negatives in this market

  • March 6, 2006
  • Rob Hanna

The market to me looks
like a drowning swimmer. Continually bobbing to the top, but not
making any headway. Breadth is narrower as breaths are shorter. Did the last
gasp come on Friday? Too early to tell, but it could be a long way to the bottom
of this murky lake. It won’t take much more selling until traders will be
looking at the October lows as a possible support. I’m getting a little ahead of
things with that last comment. There are still some positives out there.

The VIX spiked today. Bulls are declining and bears are on the rise. People are
starting to get worried about this action. Several measures of “oversold” could
be reached quite easily within the next day or so. In other words, we may
quickly be “due” for a bounce. (A good bounce to sell into, perhaps.)

Also on the plus side is there is still plenty of fuel in the form of “potential
leadership”. Last week I mentioned I was seeing a good number of stocks setting
up in basing formation. That hasn’t changed. They just aren’t moving out en
masse. Those that are moving out aren’t doing so with much vigor, either. So
there’s fuel, but still no fire. Should the market roll over, that fuel will
disappear and all those basing formations will look like consolidations that
lead to breakdowns.

The negatives are starting to outweigh the positives, though. There is no upside
momentum right now. The market is showing distributive action. (Three of the
last five days the S&P 500
(
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PowerRating) has declined on higher volume.) Breadth is
narrowing. The Nasdaq
(
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PowerRating) is lagging. Bonds are beginning to break down.
On top of all that it will soon be three years since the last time the S&P 500
underwent as much as a 10% correction. That is a very long time in between
corrections. A 10% drop from the 2/27 intraday high would put the S&P 500 a
fraction below the October lows.

While there are still support levels left (1245 being the most significant for
the S&P), it’s starting to look more and more to me like we will be testing
those October lows of 1168 sometime in the not-too-distant future. If they
break, then the April lows around 1136 aren’t too much further. A break of that
level could really make things interesting (and scary).

I don’t think it’s going to be a straight shot, though. As I noted above, the
market is already starting to look oversold after just a day and a half.
Therefore, the downtrend should start out as a choppy drift lower with numerous
opportunities to short bounces, before possibly accelerating and then
capitulating in the next bottom.

Be careful about having too much intermediate-to-long-term money committed to
the long side right now. Look for short opportunities if you have that in your
arsenal. If not, keep it light on the long side.

Good trading,

Rob

For those who may be
looking to expand their knowledge beyond just market timing, my

Hanna ETF Money Flow System utilizes the VIX in
generating trading signals for spread trades.

Rob Hanna is the principal of a money
management firm located in Massachusetts. He has spent the last several years
developing and refining methods for trading in stocks across multiple time
frames. He selects stocks using both fundamental and technical criteria, and
then trades them using technical analysis techniques.

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