Tuesday, December 13, 2005

Breakout........or Failure?

Today, for the 13th time in a row, the Fed increased interest rates. Perversely, the market rallied on the news (supposedly because there was a suggestion that perhaps the rate hikes would stop). It wasn't that many years ago there was a saying about "three steps and a stumble" (in other words, three rate hikes in a row preceded a bear market). I guess even 13 hikes haven't done the trick yet.

The market has been going nowhere for a long, long time. The flip side of this, however, is that when the market does finally decide to go somewhere, the move will be substantial. Even I, Mr. Bear, concede that if the Dow breaks 11,000 in a meaningful way, the market is going to rally strongly. There is simply too much pent up energy to hold it back. Conversely, if the market keeps failing to penetrate 11,000, as it has done repeatedly already, the market will finally succumb and wilt downward.

Take a look at the past couple of years of the Dow 30; notice where I have marked the 11,000 threshold:

There have been two earnest attempts to pierce 11,000. If it can't "punch through", the bear market I've been yacking about all year will finally start to take hold. Until then, everyone - including me - is in wait-and-see mode.

The market will either have the strength to push itself past the resistance that's been holding it back for many months, or it will finally throw in the towel as people rush for the exit doors and take profits as quickly as they can.


kurt said...

i just found your site and have enjoy it. i think your analysis is right on the mark. i have made 15 year career 8 years trading foe my own account following the market and not question anything until it breaks. along with your view of how he are doing assaulting 11,000. i have a quick comment on market sentiment. the new parten in the market as i see it is people are looking for last years performance to repeat itself. for example everyone was looking for a year end rally to start the end of october and it did. now if we follow the resent path we should go side or rally alittle for the rest of the year. then in january we will have our correction. then as we get the rate hiking over, we should rally for the remander of the year.

Anonymous said...

Well, Tim, that seems like a very two-sided way of looking at the situation. :-) You are right no matter what happens, eh?

I like Prohpet.Net, I wish you hadn't sold it to the yahoos that raised the price and removed the automatic trend finding feature so they could charge more for it by forcing people to buy their service, blah, blah, blah. Such is life I guess.

I enjoy your commentary, though!

Thanks! Happy Holidays! To everyone!!!

Tim Knight said...

To kurtom - thanks for the kind words. A few minutes after I made the posting, I happened to notice exactly what you are talking about.....that in December 2004 where we going through exactly the same gyrations we are now, and we didn't finally break down until the very first trading day of 2005! Look at $INDU for the past few years and you'll see the parallels.

As for anonymous......I don't mean to seem two-sided, but in a directionless market, I am simply pointing out that a break in either direction would be big (although I'd obviously prefer a bearish break). I'm glad you like the commentary. Happy holidays to you too.