Monday, December 18, 2006

Bearish Trading Pattern

The trading pattern in the stock market for the last two days has been bearish with a strong opening and then a sell off that doesn’t recover (much) before the end of the session.  We normally recommend selling into early morning strength (and likewise buying into early morning weakness—although we haven’t recommended that strategy recently).  This technique allows you to trade like the pros.  

This early morning strength has been caused by some “bullish” news items like last Friday’s Goldilocks CPI number coming in “just right” and Monday’s merger mania.  These event driven early morning spurts have both been sold and causes us to firm up our bearish position.  

For a market to turn over and go down, several days of this nature will occur because the bulls want to believe but there are sellers that come in to hold the enthusiastic buying from getting out of hand.  The important downturn will follow several intraday reversals such as the ones we have seen the last two days.  If you look back on December 7th, the market put in an outside down day.  That is the same type of pattern we saw in the last two days.  These are very bearish indicators because they are distributing stock to the bullish contingent.  Most people do not see these patterns and just think it is business as usual, just a reason to buy.

On a day like Monday, generally the strongest day of the week, the public watches the Dow and sees it down only about four points.  If they would look under the covers just a little ways they would see that the NASDAQ was down nearly a percent.  The barely changed Dow masks the true weakness in the market.  While the Dow has managed to make new record highs, the NASDAQ meanwhile has not broken above its November high.  

Tuesday brings us the PPI report along with the ICSC store sales index as well as new housing starts.  In the grand scheme of things, these items should be important to the market but it will probably just shrug them off and trade the way it wants to.

Monday was a big win for the bears and now we will see if there is any follow-through.

Dow Industrials:  12,441.27 -4.25
VIX: 10.60
QQQQ:  43.99
RYVNX:   17.13
RYAIX:  21.61
RYCWX:  35.53
TLT:  89.76
BEGBX:  14.05

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