Weekend Notes on the Market

Bulls saw the bottom, but do bears care? The post-capitulation struggle rages on!

What a week it was! A solid breach of the Aug’07 lows in the prior week opened the floor gate that flushed out all weak bulls along with the panicking Fed in the classical capitulation occurred in the Jan.22 and 23. The subsequent ensuring technical rebound, however, ran into a wall on the Friday.
On the weekly charts, for all major indices, the negative momentum continues to rise, but all in oversold conditions (Stochastic and RSI), with some signs of oversold rebound. It is interesting to note that since 2003, whenever both Stochastic and RSI for the major indices are in deep oversold conditions as they are now, the market always trend up for next several weeks. However, one must realize this is the first time since 2003 that market is firmly in the bear territory. It is also worth to point out that, failed to post a solid bullish meeting-line candle formation, NASDAQ has been noticeably weaker than the other two indicies.
On the daily charts, the consecutive huge white candles on both Jan.22 and 23, coupled by the extreme volumes, indicated a classical capitulation bottom. The ensuring rebound, however, was thwarted when the major indices attempted to test their Aug’07 lows on the Friday, witnessed by big bearish engulfing candles. The negative momentum continues to diminish with solid signs of oversold rebound.

Some thoughts and observations about the current market conditions and near-term outlook:
1. With a rogue French trader, the panicking Fed, and everyone else seems on the run, the market is in a deep mess with raging fear.
2. Big players have been actively repositioning themselves: there are solid signs of rotation of smart money from tech/solar/agriculture/fertilizer to retailer/homebuilder/banks and other beaten down sectors.
3. Market’s overall reactions to Q1 ER are bearish, especially on the tech names, just look at MSFT, big boys took its good ER as an opportunity to unload their long positions.
4. Even though the rebound was stopped harshly on the Friday, I expect the market to trend up next week, at least leading to the FOMC decision. The longevity of this rebound will be determined by the FOMC decision as well as a few key economic data next week.
5. Market has fully priced in additional 25 bp cut and hoping for 50 bp cut, but frankly, I am not so sure about even a 25 bp cut. My guess is that market will retest the bottom if there is no cut and will extend the rally if there is 50 bp cut.

Weekly calls will be posted later today.