Wednesday, August 01, 2007

Heavy Volatility

A late-day surge offered a dramatic end to a wild trading day.

On Wednesday, an oscillating NASDAQ saw nine direction changes of 10 points or more. At 2.9 billion shares, the Composite also saw the second heaviest trading day of 2007, and the first was just four sessions ago.

The fear of "credit plague" is nearing fever pitch, and five weeks of accelerating volume is a testament to the gravitas of the current trading environment. So much for the lazy days of summer.

Wednesday's positive close also gives it the distinction of being Day 1 of a new rally attempt. It's too early to tell if it's "the bottom", but the stock market's closing sprint on heavy trade is guaranteed to fuel some lively debate.

According to the research of Bill O'Neill, it's a moot point without a follow-through day. This is a big up day on huge volume, four to ten days from Wednesday (in this case, Tue, Aug 7 - Wed, Aug 22). Every bull market in history has begun with one of these, but there's a critical caveat. Even if a follow-through day happens, it alone doesn't guarantee a successful rally. Success requires a steady diet of follow-through days, and the more the merrier.

The chatter is that Wednesday's closing rally was driven by computer trading. It's impossible to know for sure, but leading stocks would concur. Few stocks on the IBD100 are index components, and are thus rarely a part of automated trading capers. As a result, the IBD100 enjoyed little of the closing flourish, gaining just 0.1% as only 45 of 100 stocks closed higher. Also, distribution spread to 28 stocks, while accumulation fell to 15. This was not typical, bullish behavior for a market putting in an important bottom.

The rising volume in the chart below shows that, whatever happens, the outcome is going to mean something. The NASDAQ is also back in a price band it spent 8 weeks churning through. On the daily level, stochastics haven't been this oversold since July 2006, but the weekly still has a ways to go.

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If NASDAQ 2515 holds, it would mark the bottom of a scant, 7.6% pullback. The chart below shows that not only is this less than the Feb slide, it would be the shallowest pullback for the NASDAQ since the Oct 2002 bottom. It would also mean that the sprawling credit fiasco proved less systemic than many had feared.

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Shallow pullback or not, the VIX has left tall wicks the last two times the SPX tagged the 200-day. The first time produced great results, though the Put/Call was at a greater extreme in March.

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Wall Street is very jumpy these days, and there's a palpable sense that more bad news is expected from the structured credit markets. This creates uncertainty, and nothing is worse for the financial markets.

With such a waifish pullback, the bulls have a lot of work over the next few weeks to convince buyers to return en masse to this market. New Lows crushing New Highs, 874-97 is a sobering reminder that stocks remain in a downtrend. Without a string of heavy buying, the negative bias will resume control and push prices to a new low.

Have a great day tomorrow.

best

dk

4 comments:

HeadlineCharts said...

Great insights particularly using the IBD-100

Becky said...

Your blog is a MUST READ! Thank you so much for all the work you do and for making it available! You have information I don't have access to, and I appreciate you and your blog a LOT!

Babak said...

David, re put/call, look at equity only and you'll see an extreme spike

dk said...

headline...thanks for the comment. I try and make it by your place every day. I've enjoyed your commodities theme lately.

becky...thanks for stopping by

babak...thanks, and yes, I noticed the CPCE spike, and was just doing an apples to apples with the CPC. It's a good observation though, and I agree that equity-only is more useful from a contrarian perspective.

Incidentally, Bull Luby points out a similar observation with the ISEE.