Saturday, May 03, 2008

Weekend notes on the market -- May 3 ,2008

Back to the bull market?

The growing optimisms aided by the rate cut and better than expected key economic reports, the bulls charged ahead and registered the 3rd consecutive winning week. Along the way, the major indices broke out the 2008 trading range and closed above the key resistance levels.
On the weekly charts: for all major indices, positive momentum rising for the 3rd straight week; both stochastic and RSI(2) solidly in overbought; candle formation remains bullish; weekly volumes remain relatively light.
On the daily charts: for all major indices, positive momentum stalled in recent days as the prices moving higher; both stochastic and RSI(2) in overbought; candle formation overall bullish; short-term MAs in confirmed bullish formation; DOW closed around MA200 while the other two are poised to test their MA200.

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

1. Technically speaking, the market should continue trending up for at least another 1-3 weeks. However, there would be a lot of back and forth motions as the major indices in overbought conditions. The climbing may also lose steam along the way as the ER season comes to the end and no other major economic news event for the next several weeks.
2. Big boys continue to mostly sit tight despite of the growing optimisms and bullish sentiment. This, combining the big drop in VIX, may actually setup a sizable pullback as the major indices approach key resistances (SP500 MA200-1440, NASDAQ MA200-2540, DOW 13250-13700).
3. Despite all the bullish chats, macro economic conditions are WORSE than most people think (especially the retailer bulls), just look at the Fed’s rate cut in spite of their increasing concerns over inflation and its liquid injection remains at feverish pace.
4. Market has chosen to ignore the inflation issue right now. However, if we actually never really have had a recession (as some headline reports suggested) and now the economy is rebounding, the inflation consequences may emerge stronger AND SOONER than Mr. Market expects. We all know what raging inflation could do to the market.

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