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Another (Short Term) Technical Reason For Bounce at Trader’s Narrative





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The market opened with a gap down today but then spent most of the day running uphill - most importantly it closed very close to the day’s highs. As a follow up to yesterday’s commentary on the opportunity hidden in this bleak tape, I wanted to add another significant technnical reason to expect a bounce.

Historical analysis from Lowry Research shows that:

“…a number of significant buying opportunities have been identified in the past after periods of market weakness have caused the percentage of stocks above their 10-day moving averages to drop below 10%.”

For the chart and further explanation see the original discussion. Here is the chart (as of yesterday’s close) showing that less than 2% of S&P 500 components closed above their 10 day moving average:

percent spx above 10 day MA May 2010

Today’s showing will, of course, remedy the extremely low reading for this indicator and probably result in a double bottom. It is interesting to note also that just as with several other breadth indicators I mentioned yesterday, this particular one is once again showing that this decline is reminiscent of the critical time period around October 2008.

The bounce was rather feeble with NYSE advancing volume coming in at 9.26:1 relative to declining volume. For the Nasdaq advancing volume was 2.95:1 relative to decliners. On the NYSE the number of advancing issues outnumbered the declining issues by 3.17:1. On the Nasdaq the it was 1.85:1. So we didn’t see a mirror opposite reaction from yesterday’s indiscriminate selling. But we did see the bulls put up a valiant fight and win for the most part.

I mentioned the financial and energy sector in passing yesterday as being extremely oversold with just 1% (or less) of stocks closing above their 50 day moving average. Today the banks got a major boost, rising much more than the general market proxies. Most are attributing this to the passing of the Wall Street regulation bill in the Senate on Thursday night. As a technically oriented trader I prefer to think of it as an expected reaction to the extremely oversold condition in that sector.

By the way, the Senate bill is no panacea. There is no attempt to squash the challenge of “too big to fail” institutions. Nor is there any provision for the so called “Volcker Rule” which would isolate lending and speculative activity from each other. So we are very far from removing the government teat from the mouths of Wall Street firms who like to have their profits treated as private property and to have their losses treated as public tragedies.

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One Response to “Another (Short Term) Technical Reason For Bounce”  

  1. 1 thunderbird

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    “So we are very far from removing the government teat from the mouths of Wall Street firms who like to have their profits treated as private property and to have their losses treated as public tragedies.”

    You got it. And until you cut the bastards loose, they’re going to drag your country’s sorry ass to the bottom of the ocean.

    Free market feh. Where’s the Chicago School when you need it? Oh - they were all bought out by Wall Street and are now preaching corporate welfarism.

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