Anatomy of a Bottom

I'm not a big fan of calling bottoms or tops. Frankly, it's a guessing game, like touching an electric stove when you think it may not be on...but this game leaves most with burned hands. I prefer going for trends and higher probabilities. However, unless you think there is no value in equities (and yes, some actually DO believe this), then at some point of a market drop there will be a turn higher. So, perhaps a bottom is at hand (pun intended). There are some characteristics this time around that may prove different than previous bottom attempts.

The Metrics Say OVERBOUGHT

This market is simply overdone, overbought and due for a correction. Um, that was said about three weeks ago! So, here we are, three weeks later and up about 10% more. Those looking for the pullback in time were hit rather hard. However, markets are showing complacency with a VIX down around 33, put/call ratio extremely low and bullish sentiment rising. The MacClellan Oscillator is flashing a big sell signal, and the summation index looks to rollover. Finally, risk may be a factor...as the euro/yen has tumbled below support.

Rotation and Leadership Means a Shallow Pullback

Sure, the markets are up 10% or so in that time, but some groups have soared. Take the homebuilders. Left for dead in 2008, they are showing new leadership when money is rotated out of other sectors. Commercial real estate, financial, retail and restaurants also fall into the same category. I'd bet a pullback may only be of the lighter variety, but we'll watch volume levels and see whether some good support is breached.

The Six Week Cycle Program

Market rhythm is hard to measure but it sure makes for nice symmetrical patterns. One of the more reliable patterns is a time cycle. Simply put markets run through cycles of time with bullish and bearish trends. Six week patterns are seen quite often and are fairly reliable. This is an important trend as it middles the short term and intermediate term (roughly 30 days of trading, of which the 30 MA is highly followed). This past Friday ended a six week cycle which if ended puts the next cycle (bearish) on a path to finish on June 1...perhaps starting up a summer rally.

Overbought Now, Where Could We Pull Back To?

So, if everything mentioned falls into alignment...where do we go? Taking a look at the SPX chart below, some logical targets include 809 (gap to fill, also the location of an island reversal), 827 (20 MA) and a bit deeper number would be 790 (50 MA and 38% retrace level). Fibonacci support comes in at 770 (50% level) but that could wind down to a larger-sized move. The VIX is telling us here not to expect any big pullback quickly but could build over a few days. Any pullback could be considered a bull retest (such as Mar 27 and 30). One thing we've noted are the pullbacks are strong, concentrated but short term in nature. Clearly something you like if you're bullish...buying the dips.

Disclosure: No positions mentioned

Comments

[Larry House:]

Thanks, Bob, good info. What is surprising to me is how some (many) think this market is just going to make a quick V-bottom and go right on its merry way higher and higher. Almost all pundits and respected economists agree that what we are going through is a once-in-a-lifetime event--not just a garden variety recession. We may or may not have put in the absolute bottom for the averages (I doubt it, but we may have), but to think the market is going straight up is more than I can fathom given present conditions.

Apr 21 10:53 AM

[Chris B:]

Charts are like tea leaves, you can try to read them, but your results are probably no better than random. Otherwise, mystics and technical analysts would be billionaires already, right? Ever ask the person on the other end of the psychic hotline why they're answering phones for $10/hr?

I'm waiting to see how the inevitable bankruptcies of GM and Chrysler play out before jumping full in.

Apr 21 02:39 PM

[Francisco M...:]

Cetin, you don't make any sense.

Apr 21 07:26 PM

[dcb:]

Thank God I am not the only one who has noticed.


On Apr 21 07:26 PM Francisco Martin wrote:

> Cetin, you don't make any sense.

Apr 21 10:25 PM

[dcb:]

Helpful article. if there is a pull back gives me entry points.

Apr 21 10:26 PM

[morph366:]

ChrisB
I always enjoy a fun posting but I think you overstate your case in being so negative on charts and technical analysis. Comparing a chart analyst to a Mystic Meg is good for a laugh but there are several practitioners of TA who have done very well from the markets.

If charts were so useless why do millions of eyeballs sit glued to real time Bloomberg charts and equivalent charting software all day long all over the globe?

Apr 22 09:48 AM

[montyman:]

well morph, your question is too easy to answer: why are there millions across the globe listening to Mystic Meg and her friends?


On Apr 22 09:48 AM morph366 wrote:

> ChrisB
> I always enjoy a fun posting but I think you overstate your case
> in being so negative on charts and technical analysis. Comparing
> a chart analyst to a Mystic Meg is good for a laugh but there are
> several practitioners of TA who have done very well from the markets.
>
>
> If charts were so useless why do millions of eyeballs sit glued to
> real time Bloomberg charts and equivalent charting software all day
> long all over the globe?

Apr 23 05:10 AM