Sunday, June 6, 2010

Heavy Selling on Follow Through Day +2

First off, John Wooden passed away yesterday at 99. He was an amazing man and had deep roots in my community. I will stick with some of his thoughts today –

“If you're not making mistakes, then you're not doing anything. I'm positive that a doer makes mistakes” – seems to be fitting these days.

“Failure is not fatal, but failure to change might be” – seems to fit going forward.

We had a Follow Through Day this week on the NASDAQ, but most of the strength that day was the result of Obama saying that the Job creation numbers for Friday would be great. Biden echoed his thoughts. You can see the move here –



The real numbers were released yesterday and they stunk, so the markets gave back all of Wednesday’s gains. You can see that the SPX made a new closing low for this move, but is stuck in a 12-day trading range. The trading range is right below the 200-day averages. A recovery above 1,067 followed by a reversal down, probably gets a lot of the asset allocation strategies out of stocks. A break above 1,103 will probably force the allocation models back into stocks –



Leadership has been in US Small/Mid Cap. They played catch up to the downside yesterday. Being on a Follow Through Day, these were the areas I wanted to buy and the setups were there, but did not trigger. Here is the chart of the Small Cap 600 ($SML). The trigger was a move above the 20-day (Blue Arrow). Mid Caps and Equal Weight (RSP) had similar setups and they failed to trigger as well.



If 1,068 is not retaken early next week, then the next set of key levels below here are SPX 1,010 and 950. Again, the average decline after a move similar to the one off the March 2009 low takes SPX down to 964. That would mean that SPX has made 60% of its average decline (about -150 points) and still has another 40% to go (about -100 points). This is not a prediction. Nobody knows the future! It is just looking at the averages of what has occurred in the past.

Technically, the markets are on a Follow Through Day, but distribution a few days after the Follow Through Day are the best way to kill a rally. It simply means that the big boys are using rallies to sell.

My goals now are –

If the markets hold these levels and the rally starts, then I want to know where I get stopped back into holdings.

If the markets take another leg down from here, then I want to know where the key levels are to anticipate a reversal and look for patterns that would get me in at these levels.

There were a lot of rumors on Friday. They all revolve around insolvent European nations defaulting on their debt (Hungary is the newest example) and the banks which hold that debt going out of business. There were rumors that a large European bank would pull a Lehman this weekend and blow up.

They call it “the slope of hope”, because you spend the whole decline hoping that somebody will save your stock market holdings from imploding. The G20 met over the weekend and Germany and the EU told Geithner and the Keynesians that they were not going to print more money and were going to cut spending. This was yet another hope potentially dashed. Things are starting to sound like a replay of 1937!

I will be posting a lot of charts tonight. I will break them down into three categories –

Leadership (holding the 200-day)
Line of Death (holding onto support for dear life)
Broken (rising wedges from lower lows)

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