Weekend notes on the market -- March 1 ,2008

Are we there yet?

What a bi-polar week it was! On the wings of bond-insurer bail-out news, bulls marched on for three straight days, unfazed by the dire macro-economic news. But the mounting signs of acceleration of weakening economy AND rising inflation finally enraged bears who utterly destroyed bulls on the Friday, along with bulls hope for a winning week/month.

On the weekly charts: for all major indices, the high negative momentum mostly stalled for 5th straight week; the stochastic just turned down again; the overall volumes increased following 4 weeks of contraction; candles formations bearish with long up shadows.
On the daily charts: both DOW and SP500’s test of their MA50/Feb highs failed miserably whereas the NASDAQ barely touched EMA30; the positive momentum is waning for all indices; stochastic crossed down from the overbought conditions; Friday’s big bearish candles favor more downside move in the near future.

Thoughts and observations about the current market conditions and near-term outlook:

1. The Friday’s closes left major indices within short-distances of their previous lows on Feb. 7/Feb. 22; a break and close below these lows will not only confirm the end of the counter-trend rally since the mid-January bottoming but embark a test of the bottoms.
2. While last Friday is yet another 9-1 down day with volumes at the highest in over 2 weeks, I doubt the market will go straight down here without some lukewarm rebound/consolidation in the low to mid trading range of the past 2 months.
3. The prevailing outlook of the market has been that after some consolidations within the current range, the market will firm up later this year as the impact of the economic stimulus packages and rate cuts kick in, before heading for an even big decline in 2009 when the inflation starts to show its teeth. However, the raging commodities and accelerating inflation in recent weeks might altogether remove this middle up phase. Indeed, I start to see more analysis coming out in recent days that predict a much severe and outright bear market from here all the way to 2009, if not further.
4. Despite of doing everything it can, the Fed is slowly losing its impact on the market. With the market now priced in a 50 bp cut in its March meeting, Fed is kind of pushing a string here, and even that may not last much longer if the inflation continues at the current pace.
5. The way I see it, until the market moves out of the 2-month long trading range, CTT at the lower and upper boundaries remains as the best strategy. However, CTT along the direction of the primary trend (short near the upper range) should be heavily favored.

Will post weekly calls on Sunday.