Precarious Position Again

Dec 15, 2007: 11:57 AM CST

The US Equity markets are in another precarious position, where price has reached a key inflection point, and a line in the sand has been drawn.

I mentioned earlier that the Index (particularly the Dow Jones) should find support at the confluence of key moving averages, and they did, but they are re-testing that support zone which usually is a negative development.

We should expect support levels to hold when tested and then price to inflect off these zones to higher levels.

If price tests support, rallies weakly, and then immediately re-tests support, one could assume the ‘buyers’ in this case are losing the battle between supply and demand, and we lose initial confidence in the support level to hold.

Let’s look:

Price carved out a “measured move” from 12700 to 13300 and then had the smallest of ‘bull flags’ (if it can even be called that) and then completed a measured move from the 200 period moving average (and the 20) at 13300 to (almost) 13800.

Price found resistance at the top of the 20 period Bollinger Band and then reflected off that level to retest the confluence of moving average support (from the 50, 20, and 200).

From that level, price began its inflection up (following a harrowing “Fed Day” surprise) and actually almost retested the highs of the Fed Day debacle immediately (with a gap) but the gap failed and price could not find support at the 50 day MA (though the close was above that level for the two previous days).

Now, Friday’s action took price beneath these levels and we see that the 200 period MA is the ‘last line of defense’ for the bulls.

Should price break this level definitively, we should expect a retest of the August and November lows, despite the possibility of a “Santa Claus” rally, which also could factor into equity prices.

The NASDAQ actually looks a bit better, but only because the 200 period moving average is a bit beneath the current index value:

In both the NASDAQ and the Dow Jones, volume has been creating a ‘non-confirmation,’ meaning that volume has actually declined as a whole during this recent market rally phase.

It’s a precarious time for the market, and the bulls have a more difficult time defending their territory now and the possibility that they’ll lose the battle appears to be increasing.

Time – and price – will tell ultimately, but one wonders what the Federal Reserve or the government could do more to help this market.

The Fed is already cutting rates, including the discount rate, and is injecting the markets (banks, etc) with billions of dollars in liquidity.

What hurt the market Friday was the possibility of higher inflation perhaps as a result of the liquidity injections and other macro-factors.

While discussions of that nature is beyond the scope of this site, I suggest browsing around and reading other articles on the topic to build a better understanding of the fundamental concerns that are existing currently for both the US Stock Market and global markets as well.

Stay safe.

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