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October 31, 2006

Introspection

Given that I have been touting the beginning of November as a potential turning point for stocks and that this last day of October offered nothing special for comment, let's spend today's post looking at some market internals.

This view of the last 2 months of the S&P 500 shows a very orderly rally tightly conforming to the trend line shown. We can see that the SPX met that trend line today with a bullish divergence in hand and so proceeded to rally into the close. The day did end, however, with a bearish hammer formation (shooting star) on the 30-min chart. I'm very curious to see how this formation plays out tomorrow. We bears would like to see this rally line broken soon.

stock chart

A look at the NDX show bearish momentum divergences coinciding with last Friday's high-volume selling. The market has been unable to recapture Friday's high, which incidentally was the highest-volume down day since July.

stock chart

The dollar, which has tended to lead equities since early 2005, continues to slump heavily.

dollar chart

Should the SPX break its trend line in coming days, I will view the action as a sign that traders are becoming anxious over the dollar's action. A break below 84.5 on the dollar index could trigger heavy selling in equities, while a rally above 87.25 could spell more agony for bears. Anyone trying to time a market short should watch the USD just as closely as the equity indices themselves.

Disclosure: None

 

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