Market Observations

Casey Research

Today's Market Observation  01.21.2010  Mon  Tue  Wed  Thu  Fri  Goldberg Archive

Correction in Progress

BY MARTIN GOLDBERG, CMT | january 21, 2010

The market has entered into a correction and I think it is likely that there will be more correction to follow. The first part of the correction thus far has lasted only two (2) days and is less than 3% in magnitude. The reason why I think there will be more correction to follow is that the market is still overbought in the short term. Momentum appears to be weak. And the latest up-leg hasn’t seen any significant correction in 2-2/3 months (until this week). Since the market bottom in March, even though corrections have been relatively short in both duration and magnitude, they still tended to be greater than the small 3% that we have seen so far. Many a professional and amateur technician pointed to narrow range bound market which began in early December and continued most of that month. They suggested that the direction of the “breakout” from that narrow range would indicate the market’s longer term trend. At that time a sharp technician and friend, Ike Iossif, pointed out that because a lot of folks were carefully watching this very thing, we should be on the lookout for a false break out. This was similar to early July, when practically the entire financial community saw and called the breaking of the apparent head-and-shoulders reversal as a signal of the beginning of a new downtrend. In addition, there was another clue of a fake out when the apparent breakout to the upside occurred during the winter holiday season on exceptionally low trading volume. The New Year started off with a week long rally but again, the relative volume was tepid. And most recently, Monday’s rally was on particularly low volume compared to its surrounding high volume down days. These technical characteristics can be seen in the chart below.

0121.01

Although it seems likely that we are in a short term correction that is not over, the more important question on the table is whether this correction is more than a short term phenomenon. At this moment, there is not the technical evidence to make that call.  

However, I think that the behavior of gold is likely to shed some light on the direction of the stock market. The reason why I think this is true is because gold has at best led the stock market rally and at worse, correlated with it. The daily action is pretty clear – when gold goes up, stocks go up. In the rare occasions when stocks went down, gold went down also. The lower high in gold that occurred about a week ago, followed by a selloff, suggests that the short to intermediate trend has changed from up to down. This will (only) be confirmed if support just above $105 on the GLD ETF is broken. The parabolic shape of the proposed top at above $117/share in early December also suggests something of more than a short term top.

0121.02

Similarly, the pattern of the gold mining ETF looks pretty much like a multiple head-and-shoulders reversal which would be bearish for gold and the market, but only if the pattern is completed by a decisive break of the $42/share level. Be careful! The pattern has not been completed.

0121.03

In addition to the market’s correlation with the gold market, there has been an inverse correlation of stocks with bonds. When stocks went up, the price of bonds went down. Most recently bonds are rallying as the stock market is hitting a soft patch. Recalling the not-too-distant market crash, it was accompanied by a bond rally and gold swoon. The inflationists may have the most righteous long term call; but serious money is won and lost in the intermediate term where long term fundamentals sometimes serve as a mirage or even worse. 

Ultimately interest rates must rise; but that is not to say that a bond market in the short to intermediate term rally does not present the long bond with the 2nd greatest selling opportunity of a lifetime.

Finally, it will be important to see how those stocks which, although great companies, are trading on bullish sentiment only. Apple, Google and Amazon would be a quick study. Google, in the midst of a correction has a market cap of $185 billion and is reporting their results after the close. Amazon sits on support and the pattern is head-and-shoulders; we just don’t know whether it is the continuation or the reversal type. As shown below, $125/share is a serious technical level with serious Nasdaq market implications.

0121.04

In summary, it appears that the several day market correction has not hit bottom. Whether this correction will have longer term implications will likely be indicated by the behavior of gold and gold mining, as well as the bond market and the behavior of stocks which trade mainly on sentiment.

Today’s Market

The market sold off pretty hard today, especially large financials. Hit particularly hard were Dow stocks, whose prices are the most tethered to economic reality. Outperforming today were Nasdaq stocks where short term speculators are placing their bets on the quarterly report of sentiment favorite, Google. What’s that? Google is selling off by over 4% in after hours trading? If this continues we’ll see more correction tomorrow and we’ll also see Amazon challenge an important support level.

Finally, it is relevant to note that emerging market stocks have given up their November and December highs, thereby confirming a false upside breakout.

I shall spare you any quotations from rock and roll song lyrics today.

Martin Goldberg

Copyright © 2010 All rights reserved.

contact information

Martin F. Goldberg, CMT
Email | Bio| Market Observation Archive | Website

Bookmark and Share FSO and FSU RSS Live Feed  FSN RSS Feed

FINANCIALSENSE.COM

The material on this website has no regard to the specific investment objectives, financial situation, or particular needs of any visitor. It is published solely for informational purposes and is not to be construed as a solicitation or an offer to buy or sell any securities or related financial instruments. References made to third parties are based on information obtained from sources believed to be reliable but are not guaranteed as being accurate. Visitors should not regard it as a substitute for the exercise of their own judgment. Any opinions expressed in this site are subject to change without notice and Financial Sense is not under any obligation to update or keep current the information contained herein. PFS Group and its respective officers and associates or clients may have an interest in the securities or derivatives of any entities referred to in this material. In addition, PFS Group may make purchases and/or sales as principal or agent. PFS Group accepts no liability whatsoever for any loss or damage of any kind arising out of the use of all or any part of this material. Our comments are an expression of opinion. While we believe our statements to be true, they always depend on the reliability of our own credible sources. We recommend that you consult with a licensed, qualified investment advisor before making any investment decisions. DISCLAIMER