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October 9, 2009
Share ThisToday, Shanghai reopened after a long holiday. I was a little concerned about it but was pleased to wake this morning to find it closed up almost 5%. Below is chart of the Shanghai composite. I had to draw in the last day's trade because charting seems to be delayed by a day on Yahoo's daily interval charts. In any event it experienced a good short interval reversal and is within about 5% of downtrend failure.
I'm in no way certain Shanghai is going to succeed in reversing its downtrend but its off to a good start and the first step, (failure of short interval downtrend) has already been completed. Further, I'm not certain how a reversal would affect global equity markets, but my hunch is that the effect would be positive for prices.
Regarding our own equity market, pretty much what I expected is now happening. Larger caps (eg the DOW Industrials) are already making new highs which are yet to be confirmed by the smaller caps (eg the Russel 2000). So some level of divergence is present in the equity market.
That said, the number of new NYSE 52 week highs set a YTD high on Thursday. Furthermore, the recent dip only managed a maximum of 7 new 52 week lows on its worst day. The market continues to be somewhat uniform.
I keep anticipating a top but I just am not getting the signals on the rallies which cause me concern. The recent dip was 2 weeks long and fairly deep for many of the breadth indications I follow. So the we have the potential, if the present rally fails soon, to have the divergence which is commonly associated with significant correction (one which could exceed 10% and/or persist for 4 weeks or longer).
It's good to keep in mind that a top can not happen without trend reversal. Since the dip we have rallied, and there is no reason to suspect reversal until it happens to happen. So the strategy going forward might be to raise one's stop out prices to be consistent with that premise.
If I were going to assign a probability to "new highs for all the major indices before significant correction" it would have to be above neutral probability. I base that on a number of factors not the least of which is the direction of the number of NYSE 52 week highs. That doesn't mean that those anticipated highs will not be followed by significant correction, however. Furthermore, it's too early for me to comfortably formulate probability for significant correction until more rally is printed (or if this rally fails before anticipated ... meaning that the present rally could be part of a significant correction ... but which is not very likely IMHO).
All in all? The market is behaving like bull markets typically do. Long low daily volume rallies followed by shorter higher daily volume dips to higher lows. At this point it is not clear this pattern is ending. Furthermore, it is not out of the realm of possibility to have a trending movement similar to July's. While I would give that scenario less than neutral probability, it still high enough to give it consideration (which in practice means forcing exit only upon failure of supporting trend which contrasts with selling strength hoping to catch the peak). A trend reversal in Shanghai would lend support to the thesis of July-like trending movement. One thing is certain, there is only one way to capture trending price movement. One must hold in overbought condition until price movement doesn't support trending movement any longer.
Presently it is my sense that many sold the prior dip and are apprehensive about buying at the present level. Furthermore, I consider neutral positioning to be bearish positioning and so this may be a good opportunity to give positions (one already has) the freedom to move consistent with trend.
