Why I’m still expecting another leg down

Positives:

Sentiment — Sentiment reached extreme levels as the market sold off in mid-June
and mid-July. While sentiment has become less bearish with the recent bounce, it
is still showing a green light.

Neutral:

Accumulation/Distribution — While the market has rallied the last couple of
weeks, there has been a lack of evidence of strong institutional accumulation.
Price and volume action has been spotty. Accumulation is evident when the market
consistently rises on days when volume increases and declines on days of
declining volume. This is not yet the case.

Foreign Markets — There is no real leadership evident among foreign markets
currently. Most of them are in relatively the same position as the U.S. After
selling off hard in May and early June, they have consolidated sideways and
recently begun to move back up.

Breadth — While the advance/decline line has started to turn higher, the number
of stocks hitting new highs is still not near where it should be during a
healthy advance. Breadth can be a powerful indicator. It warned us of the
pending selloff early in the year. Right now it isn’t saying much.

Negative:

My small watch list — I’m still not seeing much in the way of quality stocks
building basing formations and preparing to break out. Pickings are slim and any
further advances will likely have a hard time finding strong leadership. Without
leadership, rallies have a difficult time.

UUWNHI (Unofficial, Unscientific, Working/Not Working Hanna Indicator) — The
lack of upside opportunities are speaking volumes about this market. I have not
seen so little opportunity on the long side since September of 2002. Unless more
stocks star breaking out of solid basing foundations, this rally is likely
doomed. The choppiness over the last two months has made shorting somewhat
difficult. Still, I believe profits have been easier to come by on the short
side than the long — as long as you don’t outstay your welcome.

Summary:

From a technical standpoint, the market is still doing very little to convince
me that this rally is for real. I expect economic news to worsen and the market
to make another leg down before a strong, sustainable rally develops. A pause by
the Fed next week may delay the selloff a bit longer, but I don’t see a large
move up at this point being probable.

Best of luck with your trading,

Rob Hanna