FSU Editorial: "Net Commercials and a Market Snapshot" by James West 08/29/2007

NET COMMERCIALS AND A MARKET SNAPSHOT
by James West
buythebottom.com
forever a student of the markets
August 29, 2007

There is no doubt that the recent decline in the markets is different than previous declines (of the last several years). What stands out this time around? In one word: Volatility. The VIX has broken out and closed above 25: The last time the Volatility Index was anywhere near these levels was in late 2002 - early 2003. Moreover, it looks like higher volatility is here to stay as commercials were huge buyers of the VIX as it brokeout to multi-year highs.

So what does all this spell out for the markets? Thus far we have seen the US stock-market go through an A-B-C type correction. Click on this link to display the charts.
http://buythebottom.com/images/market-snapshot.gif

As of right now, the trend in the market is DOWN, however, from the price-charts and COT data it looks like the worst of the decline is already behind us. If you look at August's reaction-low (point C), you can see a "hammer candle-stick" on most of the charts. This tells me that there is significant support for the markets at these levels:
SPX - 1380
RUT - 740
NDX - 1825
INDU - 12600

What stands out?

The Russell 2000 is displaying relative-strength compared to the other indexes after displaying relative-weakness during the month of July. Specifically, the RUT has put in a double bottom (blue line) where as the other indexes made lower-lows.

From the COT-charts, the NDX looks the most bullish as commercials saw the decline in the markets as a buying opportunity. The other indexes look more neutral than anything else, as commercial NET-POSITION has remained largely unchanged before and after the recent decline in the markets.

However, this does not mean that it cannot dramatically change this week or next, so stay tuned...

In conclusion, there are clues to suggest that a bottom is in place for the markets, for confirmation we must watch the recent August lows to see if the indexes will hold above their respective levels of support. For confirmation of strength - I would watch the 800 level on the Russell 2000. This is a very critical level of resistance right now; if we break and hold above this level I would expect the markets to resume their longer-term up-trends.

Contact Information
James West
www.buythebottom.com
Toronto, Ontario, Canada
Email: westjam @ gmail.com (Remove the space before and after @ when sending your email)