Stock Market Analysis

Thursday, April 19, 2007

Bulls Run Out Of Breadth

Ever since the China stock market dip, causing the one day 416.02 points dive in the Dow on 27 Feb, the world suddenly changed. Suddenly big changes in the China stock market seems to affect every markets in the world in a big way. Today, the US market opened decidedly lower as the China market dips. All kinds of speculations filled the air about the China market dipping due to inflation worries and all that nonsense, but they are all wrong. After being here in China for the last 2 years, I can say that it is a hysteria and public money driven market with no fear nor concern for inflation. As long as the great prospects that lie before them continues, inflation is the least of their concerns. The reason why the China market dipped today was because of huge mutual funds exiting the market in order to seal in a 50 to 70% profit on their portfolio so far in just one quarter. However, public money is still pouring in at record rates daily and it won't be long before the public pushes it all the way higher again. In the US markets today, it took a full barrage of great earnings to push it back up to close mixed. Breadth readings continue to deteriorate as 6 of the eight major indices are down. Looks like the raging bull is out of "breadth" and needs just a short break.

Looks like it is happening as expected again. The Dow spent the bulk of the day negative or lingering at the zero point as short term bullish momentum backs off on our short term MACD and the incredibly steady volume fails to make much difference. When volume is rising but prices are not, it signifies that prices are coming up against a strong resistance level and I see that as the 12800 level. The thing about resistance levels is that it is not a thin, precise line. In fact, resistance and support levels are a bold, thick line, which covers a slight range around the resistance/support level instead of just a single point. In this case, the Dow seems to be still under the influence of that resistance level range. With the Dow already in short term overbought and sure signs of weakness as daily gains decline, it is normal and healthy for the market to back off for a few days slightly like what the Nasdaq composite has done, bring stochastics back down to short term oversold before rising to new heights.

Technical Chart By Worden Brothers TC2007 Charting Software
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