Wednesday, August 24, 2011

Is the S&P 500 (@ 112.58) trying to form a bottom?


Wednesday, August 24, 2011: It's way too early to tell, but there are a few encouraging signs:


First, the market, as anticipated, tested the low set in the 110-112 area.  It's too early to say it has passed, but the fact that for 3 days in a row it found support above 112 is bullish.
Second, the overall pattern of the market the past few weeks is in a W - tipping a bit to the left, yes, but a W nevertheless, which is a much more common bottoming pattern than a V.  
Many bearish factors remain however indicating the decline is not over:
Down volume (volume on down days) is much stronger than volume on up days; over the past 6 trading days, for example, every one of the 3 down days saw higher volume than the 3 up days (yesterday's was a bit of a tie, but in a true turnaround, you expect to see the market rallying on enormous surges in volume).  
None of the long down days (showing up as tall red bars) were negated by a close above the highs of those days.
The bottom line is that picking a bottom is a dangerous and expensive sport, but there are some signs showing up that we maybe getting there.   A rally to at least the mid-point of the 20-day range which would also take out the intermediate relative high (the middle hump of the W) would make me start to change my mind, but until then, the downtrend remains in force.  
Seasonality is not much of a help:  August has become the worst month of the 12, with September either second or third depending on which time frame you use.  The market tends to rally a bit going into and after Labor Day so expect a short, sweet rally at the end of next week unless it's swamped by negative economic news or renewed fears of the End of the World.  
Stay posted.

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