Friday, February 6, 2009

Breakout or fake-out?

Technicians characterize triangular patterns as a “coiled spring”. Triangles represent consolidation and indecision. Breakouts from triangles are considered significant as they tend to forecast the next major direction of the underlying index or stock.

As I write this, the non-farm payroll figure came in slightly worse than expected but the market rallied anyhow. More importantly for technicians, the S&P 500 staged an upside breakout from a triangular pattern.


A similar breakout can also be seen in the broader NYSE Composite:


The NASDAQ 100, which had been the leadership recently, is also staging a good old-fashioned upside breakout:



This bear market rally is for traders only
At these levels, valuations look reasonable, even by Warren Buffett’s standards. I have blogged before that we are seeing signs of healing in the markets. Is this the start of a new bull?

Not so fast.

Mark Hulbert reports that newsletter writer sentiment seems to be too bullish.

Bear markets take price and time to resolve. We have seen the price move but it needs more time. This is probably still a bear market rally. We are likely still in a basing/consolidation/trading range period until this summer. The S&P 500 has seen resistance at the 900-920 level and it will likely pause there again in this rally before come back down to test the old lows set in November 2008.

3 comments:

Miguel said...

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Best Regards,

Miguel Barbosa
Founder of SimoleonSense.com

Sammy said...

This is not a long term rally by any stretch of the imagination. The market will be scraping the prior lows in a few weeks. You'll see weakness in the U.S.$ when the 2nd stimulus package is passed and gold will continue to rise.

Unemployment is accelerating and in all likelihood, the stimulus package will fail in a few months like the first one did. The stimulus package must create manufacturing jobs if it is to turn the economy around, and it doesn't address manufacturing. There are more people working for the 3 levels of government than there are in manufacturing. Service industry does not create wealth. Only manufacturing can create wealth if these goods are exported.

Over the past 2 decades the U.S. has shipped its manufacturing jobs overseas and these are the countries that will recover first. When you buy a Japanese car, or a Chinese made TV, the money goes back overseas and doesn't stay in the U.S. The U.S. has turned into a service oriented country and you can't export services.

This short term weak bull is just the people's perception that Obama will be able to get the country out of this mess. Unfortunately it won't happen because the stimulus package is just more pork barrel politics. It will take 3-6 months for people to figure this out. The problem with the economy is high debt in both the gov't and the people. You can't spend your way out of debt with a stimulus package! It is overspending that has gotten us into this dilemma.

I'm afraid to say '09 will be much worse year than '08. The U.S. $ is a fiat currency and is likely to get devalued significantly in the next 2 years as trillions more dollars are added to the national debt.

In December China had declared they are no longer buying U.S. treasuries. Other countries are likely to follow suit because of the massive U.S. debt. That means the only way to pay for it is to print more money instead of offloading the debt to other countries with treasuries.

The next 2 years will be very interesting times for the U.S. stock market. '08 may seem like the good old days.

Celal Birader said...

This is not a long term rally by any stretch of the imagination.

Looks like Sammy was right after all, doesn't it ?