Saturday, March 03, 2007

Weekend notes on the market -- March 3 ,2007

Bulls tried to come back from the steep loss at the opening just like they did on the previous sessions, but this time, the bears took off the gloves and smacked the bulls down hard to end a horrendous week for the bulls.

The action on the Friday signals a very important change of the collective psychological status of the market: for the first time, the bears had the confidence and strength to overpower bulls' buy-on-dip mentality that worked since last August. Such change is likely to setup the psychological basis for the next stage, and trigger the bearish cycle:

** Stage 1 -- bulls continue their buy-on-dip routine in the face of first wave of big declines, bears become more self-assured as bulls efforts start to fall shorter and shorter.
** Stage 2 -- as bears gaining more strength and confidence, bulls start to second guess their decision, and hold back on they buy-on-dip.
** Stage 3 -- bears establish clear dominance, and weak bulls start to liquidate their positions.
** Stage 4 -- bears roaring around, even strong bulls start to sell their positions
** Stage 5 -- bears become over-confident, some bulls start to become bears, end is near for the bears.

We are currently near the end of the stage 1.

On the weekly charts, every technical indicators for all major indices were so bearish, I am going to say this for the first time in months: the multi-month uptrend has ended, the stage for a multi-week 10% correction at least is set. It is too early to say that the bear cycle has started. Use NASDAQ as an example, what happened this week is very similar to those happened during the week of May 12, 2006, Jan 7, 2005 and Dec. 20, 2004. In all those 3 occations, the dramatic weekly decline led to multi-month down trend resulting a correction of 10 to 20%. Daily charts are not any better as all major indices decisively dropped below EMA50 and on the way to test EMA200.

Are bulls totally done? Most likely not, in fact, I expect bulls to mount another major comeback, and may even be able to test EMA50, but that would be the last kiss-and-goodbye of a fleeting era.

weekly calls will be posted later....


bp said...

Great post, exactly as I see it after studying the charts all weekend. There may be no other conclusion. I have alerted some friends that now may be a good time to book some profits, perhaps that means I am a bear, used to say buy on dips, now Im inclined to say sell on some spikes... eh?

flyingwabbit said...

hey, bp:

I think the right mind set for the next 2-5 months is sell on the rebound, just like the right one for since last Aug. is buy on dip. The key is be patient during the rebound for the next week or two as I would still expect that bulls put up some decent fight, we shall see...

good luck!