Below is a daily chart of the NDX showing a megaphone pattern (click to enlarge):
This pattern is sometimes called a “reverse symmetrical triangle” or a “broadening top” and is usually bearish. Here is a megaphone chart that I posted back in 2009:
Two days later, the S&P 500 rolled over and dropped 63 points. But the correction only lasted six days, and the bull market resumed. So in that case, the megaphone was a signal to go to cash and get ready to buy the dip.
No pattern is perfectly reliable, and it’s not impossible for the market to shake off a megaphone. Perhaps Janet Yellen’s melodic voice has soothed the market beast. We will know very soon.
After the recession began in 2008, I no longer had to wait in line at the car wash. That was odd because I live in an upscale neighborhood, and the most-expensive service at my car wash is $10. I couldn’t believe that my neighbors couldn’t afford to wash their cars anymore. Maybe they could afford it, but could not afford to come down to their condos here in Miami Beach. Maybe the “snow bird” population had been thinned. Maybe they had to stay up north with their noses to the grindstone year-round.
Whatever the reason, the car wash is busy again. On Thursday, I had to wait in line for over an hour. Maybe the economy is reaching escape velocity – at least among the population that can afford cars.
Want to hear two rocket-scientist programmers discuss high-frequency trading? If so, then check out techzing podcast #185 where Jason Roberts interviews James Thomas of Headlands Technologies.
There are a few brief mentions of arcane topics such as functional programming and the “R” language, but the discussion is accessible to civilians. Too bad Thomas is under non-disclosure and couldn’t tell what he knows about MF Global.
The podcast is 80 minutes long, but you can download it onto your iPod via iTunes. Just search for techzing in the iTunes store.
During the past few weeks, the Dow has been trading in a rectangular range about 300 points high. On the hourly chart below, I have outlined the range with red lines. (Click chart to enlarge):
The futures have already broken out of that range, and stocks will certainly follow on Monday. To find the downside target, we subtract the height of the rectangle from the lower bound of the range. And that brings us to the March 6th low of 12735.
The last time that the market plunged after “not creating enough jobs” was on September 2, 2011. The next day, I criticized the panicky selling in “Companies Add Jobs for 18th Straight Month – Investors Jump Out Windows“. And while I was right that the expansion/bull market wasn’t over, the market did languish for a few weeks. On this chart, the red arrows point to that seemingly “bad” jobs report:
Of course, there’s no guarantee that the bulls will get off easy again this time, with only one month of chastisement. However, another important event occurred last September: Mitt Romney said that, if elected, he would not re-appoint Ben Bernanke. And so, while Doug Kass says “the liquidity rally is over”, a certain Mr. Bernanke may have other ideas on the subject.
On Wednesday, I joked that AAPL was sucking the life out of the small caps. Well, maybe it’s not a joke after all. On Friday, the Russell 2000 staged a dramatic come-back rally, and broke out of the downtrend channel that I drew in the previous post.
While the R2K was up 1.05% on Friday, AAPL was down 0.58%. Did money rotate out of AAPL into IWM? If it did, and AAPL continues to pull back, then maybe the small caps are the sweet spot in the market now.
That’s the bullish perspective. Now let’s look at the bearish side.
The IWM has been range-bound since February 3rd. Friday’s rally brought it up to the top of the range, and the IWM is now overbought on some indicators.
Thursday, the IWM fell on strong volume, and it rallied on Friday on lighter volume.
The false breakout from March 19th still stands with four consecutive closes below the breakout level.
So, the IWM still has work to do.
Momentum traders have made huge profits during this year’s rally. Maybe it’s time they hand those profits back to the mean-reversion traders, if not the perma-bears.
In any case, the small caps need to scrub that false breakout off the chart.