Stocks Consolidate Recent Losses But Additional Short-term Weakness is Likely

| August 16, 2010

The breakdown from the rising wedge last week was as violent as anticipated, and the failure of the S&P 500 index to produce even a small reaction rally during the last three sessions suggests that the decline will likely continue down to critical congestion support in the 1,060 area.

Our current cycle count indicates that the next short-term cycle low (STCL) will likely occur sometime between August 20 and August 26, and that timing scenario aligns well with the development of the short-term downtrend from last week.

There are no certainties when it comes to financial market forecasting, and the best that chart analysis can do is provide us with a rough outline of what is and is not likely to occur moving forward. However, every once in a while, important fundamental events occur in synchronization with a scheduled cycle turn, leading to the identification of specific days on which the turn is most likely to develop.

On August 24, the National Association of Realtors will issue the report on existing home sales for July, and everyone knows, with a relatively high degree of certainty, that it will show an effective collapse in demand following the expiration of the home buyer tax credit. The market knows the data will be bad, so there is a good chance that stocks will exhibit weakness heading into the release. There is also another important fundamental event on August 27 when the Bureau of Economic Analysis will report its first revision to second quarter GDP. Again, it is widely known that they will likely revise the number lower, suggesting that stocks will be vulnerable to weakness leading up to that report as well. As we mentioned above, the next STCL is likely to develop between August 20 and August 26, so both August 24 and August 27 are sessions during which the low could occur. However, given that both days will presumably be associated with poor economic data, you may be wondering why they would also be potential short-term bottoms?

Since the likely impacts of both data releases are already well known, they are both excellent candidates for “sell the rumor, buy the news” rallies. If the markets price in all of the expected negativity beforehand, and the actual data is no worse than expected, stocks will be primed for an oversold bounce. Thus, given their proximity to the next STCL window, there is an excellent chance that the anticipated low will occur in accordance with one of these two reports. As always, we are only ever dealing with possibilities and probabilities, but both fundamentals and technicals are closely aligned in this instance, strongly suggesting that these two sessions are the most likely candidates for the next STCL.

Category: Commentary, Market Update

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