Friday, January 11, 2008

WEEKLY Equity Market Comment - Week Ending 1/11/08

This week was a very interesting week to say the least, but really from a technical point of view it was a very bullish week.

I have seen this market pattern over and over and over and probably about 85-90% of the time it arrives just before a major bottom is put into place.

This week I was very hard pressed to only post the following commentary and charts as there were some extensive points of interest.

So without further fanfare here is the weekend comments.


Volatility is going to give us a very strong clue as to the next major turn in the market.

For the long term viability of the bull market we do not want to see a break and hold to the upside as this would almost assuredly bring a crash of some sort. The reason I say something so extreme like that is purely based upon the measurement factor of a coil. If the coil is broken to the upside then you could expect the VIX to go to 51 and really the only way this is going to happen is through a complete meltdown.

Now, with all of that doom and gloom out of the way, let me tell you what I think the odds are of the vix breaking the coil to the upside. About 20%, that's it. So we have an 80% probability of a break to the downside on the VIX which will bring every bit as dramatic a price rise to the upside as a bearish break would bring on the other side.

There are a couple of reasons that I expect the VIX to break its coil to the downside and thus higher stock prices.

Number 1, we have already reached levels of abounding bearishness on just about 75% of the market sectors.

Number 2, there are some very reliable chart patterns on the VIX right now that point to higher prices for stocks. I am not going to post all the charts of the patterns as it would take up quite a bit of room. Well that and the fact that it would take me a pretty little chunk of time too. But trust, the patterns are there, otherwise I certainly would not be putting my money on the line.

The NASDAQ is really starting to show signs of a strong imminent rally right around the corner.

Add to this the 5 year low on small cap sentiment of only 20% bullish and you have the possible ingredients of a fireball move to the upside.

Many of the sentiment indicators I have devised are not the run of the mill indicators you see so many analysts follow. It is because of this reason, that the sentiment I follow has worked so well and clearly at this point it is flashing a screaming buy.

The chart below represents this weeks price pattern and has formed an inverted head and shoulders pattern, which many times is a harbinger to higher prices.

The market is without a doubt sending us plenty of signals that prices will be moving higher shortly and that the next rally should be of substance say on the order of the S&P 500 going over the 2000 mark. I get ahead of myself though. First things first.

The S&P 500 needs to break the neckline on the inverted head and shoulders which is drawn in blue and ideally the lows of late Wednesdays trading should stay intact. If we can accomplish this task then we will be on to bigger and better things.

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