Saturday, April 26, 2008

Weekend notes on the market -- April 26 ,2008

Hidden bear crunching bull?

With most of ER came in no worse than expected, bulls bought every dip and along the way not only defended last week's big gains but also posted the second winning week.

On the weekly charts: all major indices posted highest close of 2008; positive momentum on the rise; most indicators bullish for the near term; overall volumes remain light for 5th straight week; candle body length/weekly ranges at the lowest in nearly 2 months;

On the daily charts:
momentum stalled but remained positive; short-term MAs in bullish trend formation; both stochastic and RSI(2) in/near overbought; candle formations for the past few days reveal both overhead resistances and clear presence of buyers below;

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

1. The psyche of the market has turned very bullish last week as buyers came in on every dip. The prevailing view that the worst is over and the second half recovery is in the cards are gaining tractions in light of overall ER picture of the past week. Given that, it seems that the path of the least resistance is now up, and all major indices are poised to challenge their MA200.

2. The counter-trend rally since the mid-March bottom has been five weeks long now. While the gains are pretty decent, they came in on light and diminishing volumes. The lack of big boys' active buying will make the on-going rally increasingly vulnerable to sizable profit-taken pullback or even trend-reversal as the market continues to climb and further stretched to the upside.

3. Next week's FOMC rate decision will be paramount to the market direction in the coming months. Right now, the market has basically priced in a 25 bp cut AND the signals of rate-cut pause in the future. I think the key will be Fed's view on the inflation picture. If the small-cut and pause are primarily out of the inflation concern, I suspect that the market will have a hard time to further rally, to say the least.

4. Next week's Q1 GDP and more importantly the April job report are critical to fundamental views of the market's inter-mediate term direction. If both come in much worse than expected, the fear that this is going to be a deeper and prolonged recession could put a top on the ongoing rally.

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