6-4-2012 Morning Comment

[Mike]

We are still waiting for a rally day to signify the beginning of a possible rally. On day 4 or later of that rally attempt we will look for a follow-through day. I have cogitated on some technical factors to attempt to understand the current down move, as to when it might complete.

The first is a price analysis looking at the head and shoulders pattern on the NASDAQ. From this perespective the down move looks to have already met the downside projection for the pattern. The procedure is to draw a neckline and then to measure the distance from the neckline to the top and then project that distance downward once the pattern breaks the neckline again. The construction lines are shown.


My next view is based on a volume analysis mentioned by Richard Arms in the early 1960’s who wrote a book on technical analysis and equi-volume charting. Arms made the observation that the total volume in a bottoming or topping structure will in general be equal to the total volume in the subsequent move until a change of direction occurs. People who know about the MIDAS top and bottom finder might see the genisis of that technique in the above statement.

In the chart below of the NASDAQ I took the total volume from the days indicated by the red horizontal line in the chart. I found that there are 62.7 billion shares that changed hands during that interval. The red line is my guestimate of the topping structure. So by this analysis we wait for another 62.7 billion shares to change hands to complete the move. With average daily volume running on the NASDAQ of 1.69 billion shares per day the “Arms bottom” should be about 37 days starting with the gap down on the chart on 5/4/12. The current move down by this analysis is now 54% complete. If volume picks up it could finish quicker.

It is not impossible for both analyses to be "approximately correct". A sideways move about 3 or 4 weeks would be about right with a new rally to follow. Timing wise that rally could be another failed rally attempt as summer seasonality in the market seldom creates a new bull market run, unless of course Mr. Bernanke launches a new QE program.