Mid Week Analysis
(11/14/00)
The markets rallied strongly today after a good reversal day on Monday. The question is now have the markets undergone a climax sell off?
The Contrarian Indicators such as the Put to Call Ratio and the Volatility Index (VIX) did spike upward on Monday however they still didn't go higher than their previous spikes in mid October (points A & B). Once again I will remind everyone that in the past both of these indicators have made a second spike higher before the markets made a real bottom. This was the case in the Fall of 1998 (points C & D) and again in the Fall of 1999 (points E & F).
Meanwhile as mentioned over the past few weeks the Bullish-Bearish Indicator still concerns me as there still hasn't been a convergence of the Bullish and Bearish Sentiment like occurred in the Fall of 1999 (point G) which coincided with the markets making a bottom. So far there is still a pretty big gap between the too.
Although it wouldn't be surprising to see the markets continue to rally the next few days there still is a chance the markets haven't made a true bottom yet.
The chart of the Dow at this point does look like it has made a Double Bottom with the the first bottom in March (point A) followed by a second lower bottom in mid October (point B). Usually it's more significant when the second bottom is lower than the first as more investors are shaken out of the market. The key thing to watch over the next week or so, if the Dow continues to rally, will be if it can break above its newly developed downward sloping trend line from the early September high to the high made last week around 11000. On the flip side it will also be important for the Dow not to break below the low made on Monday near 10400. If it breaks below this support level the Dow could drop back to 10000 or below.
The S&P 500 has now established a new trend line (point B) from the low made in mid October. It will be important for the S&P 500 not to break below this newly developed trend line on any pullback in the next week or two. Meanwhile the S&P 500 has a second trend line which slopes downward from the early September high to the high made last week around 1440. If the S&P 500 continues to rally look for resistance as it nears the 1430-1440 range. It will be interesting to see if the S&P 500 can break above the downward sloping trend line in the weeks ahead.
Finally the Nasdaq appears to have made a short term Double Bottom (W shape) with the second Bottom (point C) lower than the first (point D). This pattern looks very similar to what occurred last Spring when the Nasdaq made a Double Bottom (W shape). Meanwhile if the Nasdaq continues to rally it will be crucial for it to break above its downward sloping trend line around 3400. If it can't break through this level it could quickly go right back down to the low it established on Monday.
As stated above the markets could still rally for a few more days however the Contrarian Indicators (although not always perfect) still suggest that the markets may not have reached a true bottom yet. Only time will tell if Monday was truly a climax sell off or just the beginning of another "Bear Trap".
Meanwhile as far as the AII Top 50 goes right now there really isn't much to get excited about if your an intermediate to long term investor. Remember the best time to buy a stock is when it's breaking out of a favorable chart pattern on good volume, has low overhead supply and is in a favorable market environment which isn't the case at the moment.
I would continue to watch PLMD, SERO and USPH. PLMD is still in a Cup and Handle pattern and wouldn't be a good buying opportunity until it can break above its Pivot Point (around $61) on above normal volume.
As mentioned this weekend SERO has just about completed a Cup and now needs to develop a Handle over the next few weeks.
Finally USPH still might provide a short term buying opportunity if it can break above $19.50 on good volume as it still has remained in a Flat Base despite having some volatility both yesterday and today. The same thing also happened in mid October as well (point A) before it moved higher.
At this point there is no real reason to jump right back into the markets. As mentioned above there are very few stocks that have decent looking chart patterns. Also the markets could just as easily drop again based on what happens with the election fiasco in Florida or any other news the markets might perceive as negative. If the markets did make a true bottom on Monday then there will be plenty of time to get back into them in the weeks and months ahead.