Breakout or Fake-Out?

Technicians characterize triangular patterns as a “coiled spring”. Triangles represent consolidation and indecision. Breakouts from triangles are considered significant as they tend to forecast the next major direction of the underlying index or stock.

As I write this, the non-farm payroll figure came in slightly worse than expected but the market rallied anyhow. More importantly for technicians, the S&P 500 staged an upside breakout from a triangular pattern.


A similar breakout can also be seen in the broader NYSE Composite:


The NASDAQ 100, which had been the leadership recently, is also staging a good old-fashioned upside breakout:



This bear market rally is for traders only
At these levels, valuations look reasonable, even by Warren Buffett’s standards. I have blogged before that we are seeing signs of healing in the markets. Is this the start of a new bull?

Not so fast.

Mark Hulbert reports that newsletter writer sentiment seems to be too bullish.

Bear markets take price and time to resolve. We have seen the price move but it needs more time. This is probably still a bear market rally. We are likely still in a basing/consolidation/trading range period until this summer. The S&P 500 has seen resistance at the 900-920 level and it will likely pause there again in this rally before coming back down to test the old lows set in November 2008.

Comments

[Child Psych...:]

Cam:

Nice article. You might also mention the utterly unremarkable volume of yesterday's move. This remains--and will be for (I believe) years--a market where trailing stops are essential.

Feb 07 08:14 AM

[sieraromero:]

There is a still a lot more greed in this market than there is fear. I think from the people that I talk to that it is an almost uncontrolable desire to rebuild their retirement/savings accounts that were based in the equity markets. They do not realize that the market can go down for long periods at a time. They have been brainwashed by the talking heads to be a long term investors and to not worry about the short term hiccups that occur in the marketplace. This is not the market to be in, except if you can be nimble enough to trade in and out of the market on a constant basis. This is going to get real ugly before its over. We are at the end of the beginning and not the beginning of the end. Good Luck to you all!

Feb 07 08:35 AM

[rber:]

Fake out! Again.

Feb 07 08:49 AM

[ain't no fo...:]

I don't know what you're talking about - you sound like someone who is afraid of bogeymen and thinks TA is just about analyzing chicken bones. When incorporated into a broad program of fundamental and risk analysis, TA is an excellent supplement that can warn of impending trouble OR great opportunity.

You just have to have an open mind and be willing to learn new things and expand your horizons a little... sorta like the formula for success for everything in life, eh?

TA has worked fine for me for many years, and it kept me out of ALL the market meltdowns last year, and got me in a couple of times when I could get good fast long trades in that kept me profitable for the year... without TA I would have been down hard and whining about all the bogeymen on the pages of SA.

I don't have a five year old. If I did I probably wouldn't take investment advice from him/her.


On Feb 06 09:56 PM User 352603 wrote:

> "Oh, and well this technical indicator says ...blah, blah, blah."
> Isn't anybody sick of the talking heads. For he!! sake where were
> all these stock market wizards 12 months ago. How about a 50% triple-whippie-super-t...
> ball busting retirement smashing whammie??? I think my weather man/woman
> is more accurate. Actually, I think my 5-year old daughter is, too.

Feb 07 09:51 AM

[sleepless_o...:]

Good article, Cam.

To anyone criticizing those giving short-term analysis, especially technical analysis, I would just offer an admonition: Either stay out of the market or react to what the market is doing - any other investment strategy (or tactic) right now has a high probability of being unsuccessful. One exception would be to use up to 10% of your account to try some real deep bottom fishing. Just be prepared to lose the 10%. Examples of such gambles would be AIG, C and BAC on dips below their already low prices. These could be considered options (on survival) with no exercize date.

Finally, with respect to Friday's rally, don't forget one possible adage: "Buy the rumor, sell the news."

Feb 07 09:52 AM

[dcb:]

the market has to go up, before it can go down. I look at the bond market and commodities to determine if the move is valid or false. at this time one would have to say false.

Feb 07 09:55 AM

[dcb:]

it appears you said the opposite three days ago. explain please

Feb 07 09:58 AM

[Cam Hui:]

dcb - by "three days ago" I believe you refer to my post here: humblestudentofthemark...

The difference is in time horizon. The previous post referred to a longer term time horizon of 6-12 months. I said that downside was limited, meaning that we are unlikely to go down much more from the levels then.

This post is a tactical call of no more than a week or two, calling for a rally to the 900-920 level on the S&P 500.

I continue to believe that this range-bound consolidation pattern is part of a basing and bottoming process. This is not THE BOTTOM, just a bear market rally.

Feb 07 11:11 AM

[prudentinve...:]

From a technical basis, we were due for a short-covering rally, not to mention a "partner-trading-desk-... rally.

From a fundamental basis, I see the market as very well picked over at this point. From the perspective of a long-term value investor, I've done my bit of buying over the past six months, and have kept some dry powder as I find very little worth adding at current levels. Stocks that are still "good values" (like GE, CAT, TXT, IP, the banks, etc) all have fundamental problems that imply considerable risk going forwards. Big pharma is now cutting dividends, and we have yet to hear any health care reform ideas and their impact on pharma stocks. Low risk stocks, mostly consumer basics are actually quite pricey by P/E and dividend yield standards. Commodity stocks (RIO, PCU, FCX, X, MT, etc) are good values, but may face extended downdrafts and/or dividend cuts, despite the stimuli.

So, its a wait and see attitude for now.

Feb 07 11:46 AM

[waf76:]

the market will rally prior to the approval of the bailout package then tank upon its approval...

Feb 07 12:08 PM

[Fred Voetsch:]

"At these levels, valuations look reasonable, even by Warren Buffett’s standards"

Then Warren Buffet is a fool and I have earned the right to call him that since I seem to be outperforming him in my investing for many years now.

Have a look at the Wall Street Journal page which provides PE ratio for the major indexes:
online.wsj.com/mdc/pub...

Earning have been falling at an accelerating rate and PE ratios for all major indexes except the Utilities are over 20. Housing is accelerating to the downside and the consumer, according to Meredith Whitney, will have $2 trillion in credit pulled out from under them in the coming year or two. Not that it matters much because the American consumer has no savings and much debt and has seen their investments fall dramatically in the past year.

Feb 07 12:15 PM

[windsurfar:]

With the 50MA at 870 and the recent high close at 875 on the S&P 500, it looks like strong resistance just above fridays close?
I also note the intraday chart for friday was not the usual for a strong short covering rally that could take us higher. Strong buying in the morning, DOW hit 8300 just after 1pm, no follow through buying in the afternoon with an 8280 close. The short covering rallies have shown a disturbing pattern over the last 3 months, being smaller in amplitude and duration.
Is the stimulus plan priced in or will it push some more covering monday, and of course the big bank announcement on monday as well could cause more covering.
So many predicting a "bear"market rally now, yet almost everyone saying we retest the lows, ha, it should be interesting.

Feb 07 01:00 PM

[OldLimey:]

The charts don't lie, but neither do they explain. It's pretty clear there was a lot of short covering Friday ahead of a 72-hour period chocked full of event risk. (I also think the government is still out there supporting the market, but that's just opinion.) The bulls want a run and they may well get one, but this is still a solid bear market and it wouldn't take much underperformance from Congress or Treasury to disappoint a fragile market.

Feb 07 01:13 PM

[highlarche:]

I see a depression here. Gold will hit 1500 as people all over the world will flock to real money. What people don't understand is that its not about jewelry demand its about protection. David

Feb 07 04:42 PM

[Jim Hawthorne:]

OldLimey raises a good point!

Bears and Bulls are BOTH skating on very thin ice at the moment, and only the most flexible and nimble of either species will survive. We are most definitely still in a bear market

(Disclosure: went long CCC, ZEUS, OSG, TX, GTIV, PBT, PSMT and CFSG Friday AM, but with 4% protective stops which I raised at the close. This is not an endorsement of these puppies, and if you buy them due to this post, your wife may never speak to you again, and just might run off with the mailman!)

On Feb 07 01:13 PM OldLimey wrote:

> The charts don't lie, but neither do they explain. It's pretty clear
> there was a lot of short covering Friday ahead of a 72-hour period
> chocked full of event risk. (I also think the government is still
> out there supporting the market, but that's just opinion.) The bulls
> want a run and they may well get one, but this is still a solid bear
> market and it wouldn't take much underperformance from Congress or
> Treasury to disappoint a fragile market.

Feb 07 11:16 PM

[Perry1961:]

I jumped in with both feet wednesday. When I saw the Baltic Dry Index pole vaulting skyward,I knew half the problem was over. The credit lockdown caused by the Fed letting Lehman go under seems to have abated. Shippers have rallied 25% in the last week. It made sense that financials,techs,and energy would be close behind.

Feb 08 02:58 AM

[Pretzel Logic:]

The upper line of the bigger (and symetrical) triangle connects the Nov. and Jan. highs, and is currently around 900 on the SPX. I'll be shocked if we can break out of that with conviction. I agree with your analysis that this is a bear market rally.

Feb 08 06:38 AM

[dlud48:]

Charts look good until the moment they look bad and vice versa.

Once a pattern is discovered, it disappears.

One of the few truisms- "Wall Street never dances with the same partner twice."

Conclusion? Be nimble- They're after us all.

Feb 08 10:33 AM

[Dave Wrixon:]

Isn't charting at this time a bit like trying to do the North West Passage using a map for the Hudson?

Feb 08 01:46 PM

[johnthecono...:]

Oil is NOT confirming any equity rally. Before you can seriously go long the equities oil has to start to break out FIRST...and oil isnt the only non cofirming factor voluime was not very good either.

Hope people save themselves from being fooled here.

Feb 18 10:44 AM