Thursday, June 14, 2007

Anybody Scared?

In what may prove to be a key plot twist, higher producer prices, steady yields and a jump in oil failed to scare away investors on Thursday.

Instead, the NASDAQ gapped and ran 17 points. Even though volume slid 5%, strong market internals suggest that the shorts were the group that got religion on Thursday.

If tomorrow's CPI resembles today's PPI, the bears have good reason to be skittish. A decent CPI is a big "if", but not only were the internals strong on Thursday, the market leadership continued to pound it home as well.

The IBD100 more than doubled the NASDAQ's gain with a 1.4% surge. As 80 of 100 stocks moved higher, a solid 22 hit record highs and 28 saw accumulation. In all, just 4 stocks experienced any selling pressure. Investors buying the market leadership aren't acting worried about Friday's inflation report.

If the bulls have anything to be scared about, it's that the chart below is so technically wobbly that it's one that only a mother could love. Consolidations make all charts look ugly, and this one is no exception.

If Friday is a down day greater than 25-28 points, the Composite prints a bearish head-n-shoulders. As if that weren't enough, the descending MACD means that price has no momentum, leaving it susceptible to further convulsive moves.

If the chart is printing any advantage, it's that since price first broke above the upper band 14 sessions ago, it's closed there 9 times. For all the distribution, sellers have been unable to keep price down in the box.

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The photo at the top of this post contains a deliberate tinge of irony. Regardless of what the brave words say, those eyes show fear. published its latest Investor Sentiment index Wednesday night, and it reported a Bullish level of just 14%! Since 1997, lowrisk Bullishness has been this low only 7 other times. Individual investors are scared.

Meanwhile, the NASDAQ sits just 1% below a new 6-year high! Historically, investors are rarely scared at market highs. Instead, they grow braver and more bullish. Statistically, scared investors have moved to cash and bullish investors are all in. That's why extreme bearishness at market highs is contrarian bullish. Investors aren't "all in", and the fuel exists to push stocks higher.

In a great post, Babak over at Trader's Narrative examines the lowrisk indicator today. In a nutshell, he points out that the accuracy of the lowrisk indicator benefits from smoothing via moving averages, and timing can be off a few weeks, but big sentiment extremes are useful contrarian indicators. Few get bigger than the one below.

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The TOF Ratio picked up steam today as option investors shifted to calls. The Ratio is now a little hot, but during Quad Witch the Put/Call can spin like a compass in the Bermuda Triangle. For now, it's just good that it's pointing north.

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A look across the charts tonight reveals an absolute forest of head-n-shoulder setups. Even though the bears have blown countless opportunities in recent weeks, they get another chance at redemption tomorrow. As luck would have it, it could be their biggest opportunity yet.

If the market sells off significantly -- about 1% or more -- countless charts will suffer technical damage possibly requiring weeks of repair. On the other hand, a big accumulation day clearly adds to the woes of the bears. The ongoing technical advantage for the sellers is that many indicators -- especially MACD -- are very weak.

If you add it all together, the overall advantage tips ever so slightly to the bears again tonight -- but they're on borrowed time.

Tomorrow should be interesting, and until then have a great evening.




muckdog said...

Core PPI was low, though. And only up 1.6% year over year.

dk said...

Hi muck..yes, and the same thing happened on CPI this morning. In fact, quite a bit better. Throw in quad witch, and Friday should be a wild one for the's bullish that the market is ignoring higher energy costs...