Wedge Formation and Seasonality Favor the Downside!

August 25, 2008

The market continues to trade on “noise”, chopping back and forth on every tidbit of information. On a daily basis, I could justify the move and tie it to a news story. The truth of the matter is that there is not a catalyst and traders are taking time off during a quiet market. We just emerged from earnings season and that variable is known. The Fed is content to leave rates unchanged and that variable is known. Earnings and interests rates drive the market and for the time being, they are AWOL.

Earnings for the S&P 500 were dismal. They declined 20% this quarter compared to last year. If you strip out financial stocks, they were up a meager 4%. The market will wait for next quarter to see if we are on the mend or if conditions are on the slide.

Last week, Ben Bernanke suggested that inflation is moderating. However, he also mentioned that economic conditions are deteriorating and he voiced concerns over the credit market.

This week, we will gain more insight into the presidential race during the Democratic National Convention. The polls have shifted and O’Bama’s lead has vaporized. Dissension within the party is helping McCain gain traction.

Tomorrow, we will get consumer confidence, new home sales and the FOMC minutes. New home sales will continue to struggle and bad news is already factored in. The Fed has been fairly vocal and I am not expecting any surprises when the FOMC minutes are released. Wednesday, we get durable goods orders and crude inventories. Those two releases are likely to determine the direction for that particular day. Thursday, the GDP an initial jobless claims will drive the market. Each day, there will be a news release and choppy trading. Once the early momentum is established, the market tends to follow through in that direction the remainder of the day.

As you can see in today’s chart, the market is not made any progress in the last month. A wedge pattern has formed and that means that we are likely to breakout or breakdown in the next few weeks. The intermediate term downtrend favors a breakdown. The next six weeks are seasonally bearish and that increases the probability for a decline.

There are many negative influences and I am bearish. I will not trade that bias until I see a close below SPY 126.
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August 22, 2008

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