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Confirmation Day? No

Posted By Barry Ritholtz On April 13, 2005 @ 8:30 am In Markets,Psychology | Comments Disabled

A few people asked if yesterday’s reversal counts as the previously discussed [1] Confirmation Day. The short answer is no: It requires a much bigger rise on significantly stronger volume.

The longer answer involves the psychology behind the shift from selloff to rally: What’s needed is a high degree of conviction that the worst is behind us by institutional shareholders. The confirm day is evidence that a strong appetite for equities has been stimulated. This may be accompanied by a fear of being "left behind" as the market rallies. The evidence for this is very strong volume, big up/down volume, strong A/D. 

By that measure, the jury is still out. We traded down to year-to-date lows on low volume, saw the Arms Index spike up, which generated a few buy programs and a reflexive rally on the Fed minutes (which in and of themselves were hardly Bullish). 

The reversal yesterday would have been far more significant if it was at the end of a long downtrend. That might have revealed a possible shift in psychology. Instead, it came after two weeks of sideways action. 

In my opinion, the very widespread search for a bottom hardly shows the extreme levels of fear needed to make a more reliable low. Perhaps we run for a few days, but  I hardly see more than that. I am watching 10,550 on the Dow, 1192 on the SPX, 621 on the Russel 2000, and  2020 on the Nasdaq.  Also worrisome is the breakdown in the  Transports since early March, despite a very hefty pullback in Oil. Watch 3720 on the index.


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UPDATE:  April 13, 2005 9:44am

A friend who works on an Institutional Sales desk (and "liked your Confirmation Day note") emails me the following  from Stan Weinstein [2]:

"Also, it is important to
note, the S&P 500 (.SPX) held its 150
moving average @ 1170, and put in a nice reversal day, closing at basically the
high for the session (1187.76). Given this activity, we would expect a couple of
days of positive trading from this point, which might make for some profit
taking or new shorting opportunities. It is likely that this rally will prove to be
short lived
.

However in order for this rally to turn into
something more than just a few day bounce we would need the following levels to
be overcome on a closing basis: DOW 10560, S&P 500 1192, COMP 2022, and .NDX
1506."

That’s pretty consistent with my own views. That’s not surprising, considering that Weinstein’s book, Secrets For Profiting in Bull and Bear Markets [2], was a seminal book in the develpoment of my own quant/technical market analysis. The key, according to Weinstein, is "stage analysis" — using charts to determine where a market/sector/stock is
in its cycle: going up, topping, declining, or bottoming out. I haven’t read it in a long while, but it was a classic.

On the other hand, I greatly respect Dick Arms’ work. He is more bullish than I am — at least for a short term pop up to Dow 10,800. 

"Going into Friday’s market last week, we had seen four up days, but the rally
looked suspect because of the low volume and the still-overbought Arms Index
numbers. But the selling on Friday and Monday produced high-enough daily Arms
Index values to push the 10-day moving average to its most oversold level in
about two months.

Tuesday, the markets staged a very impressive one-day reversal as they
tested and bounced off the January lows again. Volume was a bit better on the
reversal. The Arms Index numbers remain oversold for the 10-day moving average.
This looks as though it may be the beginning of a rally.

On a cyclical basis, as I showed last week, a low is due in this
vicinity. This may be the start of a turn to the upside.
The cycles recently have had a wavelength of about two months, trough to
trough, and the moves in each direction have been in the neighborhood of 300 to
400 Dow points. On that basis we might project a rise to around 10,800
over the next few weeks.

The real key will be a breaking of last
week’s highs on good volume. I think, though, the likelihood is good enough to
justify some buying in here. We have ridden the whole decline down, resisting
the impulse, until now, to buy. I now am more aggressive than I have been in
well over a month."

As always, we strive to be both "Fair and Balanced" (although some have accused us of being fairly unbalanced).  Your mileage may vary . . .

 


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URLs in this post:

[1] previously discussed: http://bigpicture.typepad.com/comments/2005/04/bottom_spotting.html

[2] Stan Weinstein: http://www.amazon.com/exec/obidos/ASIN/1556236832/thebigpictu09-20

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