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Support Broken and So Is This Market August 6, 2011

Posted by Tom in Thoughts.
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No surprises for us this week, the support level from last weeks blog, was broken and the market continued to drop.  The next logically question is where will it end?  I don’t know, nor does anybody else (regardless of what they tell you).  Any estimate would be a guess, especially since the news from around the world is driving this market . . . and maybe, rightfully so.

I’ve pointed out that this last market peak in July was “higher prices on lower volume” when compared to the previous peak in May.  I won’t post a chart supporting that because some folks say I’m getting too technical.  But for those interested in it go to BarCharts.com or similar stock chart site and take a look at the S&P 500 prices and volumes during those periods.  The bottom line is this last peak (in July) did not attract more buyers.  No new buyers means that everyone interested in buying has done so (and a possible next step is . . ).  That does not mean that a market has to crash, but it does indicate weakness, and a market that is susceptible to bad news.  Enter the US and Euro debt issues.

We’ve gone from a “greed” situation to a “fear” based one very quickly.  It’s OK not to catch the tops, but it is NOT OK to “be patient” and ride it out.  preservation of capital is important, especially in retirement funds.

What’s happening now?  No surprise that everything coming up in my scans are “short” ETF’s (ones that go up when their index drops; yes, the do exist) and the precious metals.  BTW, Gold and Silver are hot now, but as the saying goes “they take the stairs up, and the elevator down”.  Be VERY careful here, not a good place for amateurs and especially not for large positions(Notice how gold sold off with the market crash this week?  Why?  because when you have to sell things, you sell whatever you can quickly.  Pros know that many stocks can’t be sold quickly without effecting prices significantly; liquid securities like gold can be sold quickly.  FYI . . . be careful with precious metals, it’s a crowded trade!)

Other “safe” areas: Swiss Franc, defensive stocks (tobacco, utilities, consumer staples) and high quality bonds.  Most of the country ETF’s are in a similar situation as the US and European ones, no hiding in there.  No surprise that the number of S&P 1500 stocks under Accumulation was only 1.4%; 8% Unchanged and 90.6% in Distribution.  But, 32% of them were improving (trending up); 7% Unchanged trend and 61% still headed down.

We are at /near the 1174 level for the S&P 500 Index.  That would be a good support level IF it holds (no guarantee).  The next level would be around 1128 (minor support), then 1128.  We will have to wait and see how this market responds with a rally day; does it have good volume and across the board participation, or will it be anemic?  Richard Wyckoff had a theory:  don’t buy the first rally.  I think his idea was to let the market tell you just how strong it is, and you can’t see that in price alone (IMHO).

Be patient and (definitely) be careful.  Have a good week.

BTW, please feel free to make comments, click the link at the top of any post.

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