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Lowry Research: Distribution & Correction Ahead at Trader’s Narrative

The last time we checked in on Lowry Research was in October when they were continuing to be bullish (after arriving late to the party) but were cautious that the market could see a pull back.

Within a few days we got exactly the sort of correction Lowry predicted. The S&P 500 fell from 1090 to 1040, right into the support provided by the 50 day moving average. In the latest Bloomberg podcast, Tracy Knudsen from Lowry Research updates us on what the oldest technical analysis firm on Wall Street thinks is ahead for the market.

You can read my notes below and listen to the interview at the bottom but in case you are pressed for time, here’s the 10 second recap: Lowry continues to believe that the primary trend is higher but we are due for a mild correction.

  • market internals have deteriorated during this slow grind higher
  • slow grind will devolve into a correction
  • weakness in the Utility & Industrial sectors
  • most relative strength in the Energy sector
  • slightly higher upside volume but no concomitant gains
  • this evidence of churning often leads to distribution
  • breadth momentum: % of stocks trading above their 10 day moving average
  • although AD lines move higher, the extent of the gains are diminishing
  • the market is overdue for a correction
  • haven’t seen market correct in some manner since December 17th 2009
  • if Selling Pressure indicator moves higher combined with Buying Power falling, then we could see a more serious correction
  • right now, both BP and SP remain as before, indicating a healthy rally
  • so any correction would be minor
  • the first area of support in that case would be 1100 to 1115 in the S&P 500 index
  • once again, this also coincides with the 50 day moving average
  • we should see selling taper off in that area, if not the next support area is at 1085
  • Q: what if external (artificial) liquidity is skewing the real dynamics of the market?
  • Lowry’s proprietary indicators have been guiding us since the 1930’s by measuring supply & demand
  • right now they tell us the primary trend is higher but the market is overbought (awaiting a short term correction)
  • the market can not keep going higher each day without a correction and it is time for one

S&P 500 Lowry Research update Jan 2010

  • it is possible the market will “correct” by going sideways
  • this is what we saw during Nov-Dec 2009
  • Lowry expected a correction but instead it worked off overbought conditions this way
  • right after last correction in mid-Dec, the market turned around and went higher
  • there is a “buy the dips” mentality out there
  • if the market turns around after a small correction as before, this is why
  • people trading off optimism on economy and the Fed’s zero rate policy
  • sentiment indicators show an extreme number of bullish people out there
  • traders are not hedging against the possibility of a correction
  • perhaps they believe that it will be shallow and short term as it has been
  • low put/call ratios, investor polls (AAII) show a wide spread between bulls and bears
  • last time AAII gap was this wide was February 2007 which preceded a 7% market drop
  • newsletter writers (II) are also very bullish: the highest spread since 1993

Tracy Knudsen of Lowry Research:
You can listen to the complete interview of Pimm Fox with Tracy Knudsen here. Press play and let it buffer, then skip ahead to the 29 minute mark:

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