Wednesday, January 24, 2007

A Win For The Bulls, or Was It?

Market Action:
As the market opened there were plenty of jubilant bulls buying up the techs that reported on Tuesday evening.  Even though the news out of those companies wasn’t really all that good, the consensus was that it wasn’t bad enough to sell them so let’s buy them.

The Dow opened up and just kept steaming ahead to close at another all time record high just above 12,620, up about 0.7% on the day. The NDX, NASDAQ 100, pretty much hit its high within the first hour and a half up about 1.5% and finished right around there, well off its highs set a few weeks ago.  

On Tuesday evening, YHOO announced their earnings which, while not too great, did invigorate the after hours and popped the opening on Wednesday.  The biggest beneficiary of that news was actually GOOG which had a bid day moving up 20 points to right around 500.

As the market closed on Wednesday, there were further earnings reports that helped to move the market.  The big one was EBAY and that lifted the internet companies again in after hours trading.  EBAY added about 5% on the back of YHOO’s news on Tuesday and then added another 13% after its news on Wednesday.  Even the report in the WSJ online edition said that the holiday season was very good for EBAY and maybe the market should keep this in mind when pricing in future results.

We thought we would skip over the rest of the issues and go right to the analysis.  The volume on the NYSE was nothing special and less than Tuesday’s volume.  We also see that the momentum indicators edged up a bit and are very close to overbought.  The NASDAQ indexes are still a bit below their recent highs.  The VIX, our volatility index, was down below 10 again but not below the levels set at the lows last month.  All of these items by themselves should serve as a warning to traders but they are not paying any attention.

The new high in the Dow will allow the masses to stay in their complacent mode just a little while longer.  We believe that Wednesday was a good day to sell into the strength just as we mentioned in our last post.  You may not see the wisdom in that advice but the pattern in the market is a close to a sell signal as you can get without actually being a breakaway down day.  

Yes, this upward move could continue now that the Dow has succeeded in making a new all time high but the pattern is complete to the upside as far as we’re concerned.  The most difficult thing an investor has to do is selling when prices are high.  They normally get greedy and think there is just a little more that can be made.

Markets that are in a mood to change directions tend to be very erratic just like we’ve seen for the entire month of January.  Normally, this type of volatility would raise the VIX but complacency is rampant.  The fact is that Dow made a new high on Wednesday just about 40 points above the high set about two weeks ago.  The broader market is struggling to keep up with the big 30.  

Tech Talk:
The move on Wednesday looks like a C wave—here is what that means:  A C wave is part of a corrective wave but it looks like wave 3 action.  A C wave is an ending wave and a wave 3 is a continuation wave that will lead to another leg up.  A C wave is generally a powerful Price move and sometimes it occurs with lower volume, both of which are true about this move.  We still think that Wednesday was a good day to sell.  Hopefully, Thursday will give you another chance.

Dow Industrials:  12,621.77  +87.97  (New Record High)
VIX: 9.89  (below 10 again)
HUI:  334.65
QQQQ:  44.30
RYVNX:   16.55
RYAIX:  21.08
RYCWX:  34.70
TLT:  87.61
BEGBX:  13.54

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