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Market Over-Reaction or Is Trouble Ahead ? November 9, 2012

Posted by Tom in Thoughts.
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No need in restating the obvious: this market is weak; but we’ve known that for weeks before this week.  I think the public is just now catching up to the fact of this weakness since soooo many people want to tie it to the election outcome; not.

1)  Trend Lines Broken: Check

2) A Sign of Weakness (labeled as “SOW” on chart): Check

3) A failed Rally (labeled as “UTAD” on chart): Check 

     (click on chart to enlarge it for easy viewing)

The time for being concerned was in early October.  Now . . . we should start looking for buying opportunities.  No action just yet, but looking and watching are a good thing.  Why?  Because the sell off that started on Wednesday (appears) to be an emotional reaction to the election and Europe.  The fundamentals have not changed in that short a time.  We expected and got additional selling once the 2950 level was broken.  But look at the volume during that sell off; not that heavy, supply is not coming into this market (yet).

We see the Price Strength pie chart below showing substantial weakness; no need to stand in front of this train !  And we see Accumulation / Distribution chart below it; not strong, but also not as weak as one would expect based on price alone.

 

What next?  perhaps a bouncing around range between 2950 and 2850 waiting for some news to push the money flow either all in or all out.  That would be my initial thought.  Let’s be very watchful if this market starts to rally upward.  Is it showing signs of strength or is it likely to fall back down?  Right now it’s difficult to say.  But I’ll be watching for the same signs in reverse that appeared at the market top.  A break of the Purple Trend Line (subject to being re-drawn); a Failed Move lower; and a Sign of Strength.

Be patient.  This may take weeks to unfold.  There will be time to slowly scale back into the market IF it strengthens.  Let’s hope Congress helps out and finds some room for agreement of the deficit plan.  That would help out a bunch.  Until then, be careful and be watchful, that will pay dividends.

Have a good week.      ……….  Tom  …………

price chart courtesy of MetaStock; pie charts by www.HighGrowthStock.com; all used with permission

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