Weekend notes on the market -- March 16 ,2008

Ready for the second legs down of the bear market?

A new round of bad news in the financial sector punched out a big losing week on the Wall Street. The decline ended the multi-week counter trend rally/consolidation as the major indices broke out the 6-week trading range and on their way to test the Jan’08 bottoms.

On the weekly charts: for all major indices, the negative momentum start to rise again after being stalled for 5 straight weeks; the stochastic just crossed and headed down; the overall volumes increased quite a bit for the 2nd week; candles formations bearish with expanding bodies; not quite in oversold yet; overall technical indicators strongly favor more decline in the coming weeks.
On the daily charts: for all major indices, the momentum not only flipped to the negative side but on the rise; just approaching oversold conditions but no signs of turn-around yet; new closing lows; NASDAQ broke the Jan’08 bottom;
On the 60 min charts: for all major indices, negative momentum receding; nascent signs of oversold rebounding; several bullish-engulfing candles coupled with strong volumes during the latest descending;

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

1. After weeks of the counter-trend rally and sideway consolidation, the market went down a notch and is now poised for the second legs down of the bearish movement that started late last year. The question now, IMHO, is no longer IF but WHEN and HOW.
2. Historically, the phase of the second leg down movement has often been smaller but faster than the first leg. Judging from the market actions in the past several weeks (strong buying whenever the market making lows), I am not so sure that this time around the second leg movement is going to be quick and straightforward.
3. It is very intriguing that there has been little fear as the technical pictures of the major indices turning decisively worse in last several days. This is best illustrated on the Friday when NASDAQ took out the Jan’08 intra-day low, and there was no significant spiking in volumes (not a lot of stop-loss orders there), as if the Jan bottom was completely irrelevant. The lack of fear is also reflected in VIX which is at a much lower level than that of the Jan. bottom. While I don’t know how to interpret it, I am certain that we won’t have a bottom of any kind until we see the fear and blood on the Street.
4. The Fed is on steroids when it comes to rescue the market. It is pumping the liquidity into the market as if there is no tomorrow. However, with the market has already fully priced in a 50 bp cut and the majority looking for 75 bp cut, you have to wonder if all Fed’s actions just prolong the eventual big decline at the best.
5. There might be some technical rebound early next week, but as the primary trend has now resumed, CTT at the top when the rebound loses steam becomes the best swing strategy.

Will post weekly calls on Sunday.