Tuesday, March 21, 2006

Failed Breakout - Hurrah!

Today was a really interesting one. The Dow pushed higher by about 50 points, started weakening, and never looked back. It wasn't a collapse by any stretch - - the Dow closed down 39 points - - but this kind of "pop and drop" day is wonderful, particularly since it's demoralizing to the bulls.

Let's first look at the S&P 500 index. Take note of the blue trendline above the prices (resistance, obviously). See how the prices are progressively unable to touch (let alone cross above) the line. Finally, see how the prices give up and surrender away from this line.

The intraday chart of the Dow is similar, except this index shows more strength. In fact, it pushed itself to a new multi-year high today, only to see it exhaust itself early and start the descent.

The longer-term view is what really counts. Below is a daily graph of the Dow 30 going back more than a year. As you can see, the prices did in fact move above an important resistance line a few days ago. If this line holds, it could be bullish for the market (hissss). If today's weakness follows through and pushes prices back below this resistance level, it invalidates the breakout altogether.


Des said...

Mr. Knight,

Sorry to be off topic, but I would like to once again thank you for suggesting puts on AAPL and ADSK a few weeks ago. Wonderful, wonderful stuff.


Kapil Khanna said...

If the dow breaks 10900, i will ride the bear down :).

NO DooDahs said...

I'll call it a failed breakout on the S&P when it closes below 1295. See chart.

I'll call it a bear when the S&P violates this two-and-a-half year trend line (in green).

Tim Knight said...

My pleasure, Des! Happy you made some green!

costas1966 said...

The Nasdaq is toast. Down on more that 2 billion shares after a failed break out. The S&P 500 is a different animal. It sold off right to the top of the previous resistance which avted as support to day. For the break out to faile there, it will take one more day on accelerated volume, which I think we will get it tomorrow o the day after. I suspect the bulls are running out of musical chairs.

bsi87 said...

no doodahs's charts are interesting but several things to consider. We're nearing the end of the annual seasonal effect and funds inflow. MACD on SPX weekly is diverging, lower highs each time SPX hits a high. Lowry's Paul Desmond has done top work - long story short is the number of individual stock new highs within the index deteoriates as the index hits new highs. DJIA is the easiest to do. It hit a 52 week intraday high yesterday. Only Dow stock making a new high was BA. Market is losing leaders as it moves up. May not be the time to short but it's not time to buy the dips for a buy and hold situation either. JMO.


NO DooDahs said...

bsi87, take a look at the dailies for the S&P 500. The index made three rises, one at each side of Feb, and the recent March one. Daily MACD is higher on each subsequent peak, as each peak is higher in price than the last. The daily RSI confirms, again each price peak corresponds with a higher point in the RSI.

Check out http://stockcharts.com/def/servlet/SC.web?c=$INDU and http://finance.yahoo.com/q/cp?s=%5EDJI. 24 advancers to 6 decliners in the Dow, with 7 up more than 1% vs. 2 down more than 1%. That's a pretty broad advance, just about every market was 2 to 1 advancers.

I disagree about the importance of new individual highs being a sign of a healthy advance for an index high. Actually, a strong number of individual highs means that the advance is weak, and is carried by a small number of stocks. When the index is zooming to new highs, and the number of individual highs is small, that must mean that very few of the members are showing extraordinary weakness, and that the index is advancing broadly.

I have outlined in my previous charts and on my blog the points at which I will re-evaluate my bullish stance; have you drawn the line in the sand, that if the market crosses it, you will re-evaluate your bearish stance?

bsi87 said...


if you look at the weeklies re SPX, the MACD looks like a pimple on an elephant's rear. ADX shows a nontrending situation in most indices so trending indicators like RSI and MACD aren't much use esp on ST time frames.

Volumes are weak on the weeklies, up on down weeks and down on up weeks.

re: new highs. Take it up with Paul Desmond, I'm quoting his work.

A top is a process, not an event, so I'm maintaining a short position but trading long a few individual stocks that have been kicked to the curb.

The seasonality effect is running out shortly.

We disagree but the question is are you prepared should something go abruptly wrong with your bullish scenario?

NO DooDahs said...

If (and I do mean IF) the various support levels are violated, I'll be jettisoning my weakest investments and actively trolling for stocks to short.

Until that time, I'm all in and all long, except for the occasional short that falls in my lap.

Tim was kind enough to state the levels at which he'd re-evaluate, and I have done so as well. bsi, what level (if any) would the index have to hit to convert you (even temporarily) to bullishness?