Market comments for Aug. 11, 2011 (UPDATE)

It's a big day for data release at 5:30am PST for Initial Jobless Claims. In addition, we broke below of 11,000 on the Dow. So far we have not held above 11,000 and so as each day goes by, one must conclude the market is at risk to test Dow 10,000 eventually.

From the Dow charts below, you will see we did rebound after the sharp decline and then the rebound followed by the retreat to a lower low. The Dow closed Wednesday at 10,719. The low for the day was at 10,686.


Volume was high again with a 520 point drop. If you look at the chart below, I took readings on volume for the Dow starting around 11:30am PST and recorded the reading of the Dow at the same time as I recorded the Volume. From the intraday Volume/Dow chart below it is clear that as Volume increased the Dow drop accelerated. So there was a lot of selling behind this market again Wednesday.

My expectation for Thursday is that if the Initial Jobless Claims shows a sharp increase to say 420K or more, the market may sell-off again! However, if the Initial Jobless claims come in at 400K or less, we may have a rally and retest the 11,000 level. Remember there is a predisposition for the market to decline rather than recover right now.

But let me be clear here, we are headed lower, as I have stated many time here, this past week. Just check my previous Blog posts for the last 7 days.

UPDATE: 5:31am PST Aug 11th

Of particular note this morning is that France's CAC 40 Index has slipped below 3,000 while Britain's FTSE is now below the important 5,000 level as we awaited our Initial Jobless Claims data. Our Nasdaq Index is getting to testing the 2,400 level as well, after its decline yesterday. All of these are major psychological levels for investors. Our Dow Futures have been down about 140 points since our premarket opened at 5:00am. Gold Futures Margin requirements have been raised by the CME (CME is the world's leading and most diverse derivatives marketplace).

The Initial Jobless Claims number came in at 395K for week ending 8/6. That's down 7,000 from the previous week. It is a better number, but only slightly. The question is now whether the market will rally on the news. Our Trade Deficit came in at $53.0 Billion in June compared to $50.8 in May.

And finally, leaders of the Senate and the House have selected their representatives to form the Committee, which is charged with the task to come up with Spending cuts and any revenue (tax) increases by November 23rd. Many point to the fact that none of these people chosen in the Senate were members of the Gang of Six, who worked for 10 months and came up with many recommendations for spending cuts and tax increases in a bipartisan way. They knew where the money was as they studied much detail in the budget numbers and were quite familiar with where to get the money from. So there doesn't look like much hope these members will come to an agreement in time.

Stock market prediction going into January

I have been looking at the chart of the Dow and decided to look at a 6 month timeframe as it seems the market has been going straight up, although lately seems to be still strong. I wanted to determine whether the Bulls case is warranted and whether there are any signs visible to the average investor with limited knowledge that all might not be as good as all the talking heads are saying. You can't find anyone Bearish right now, except Robert Prechter and his Elliott Wave Theory. Well while I do like the Theory I also use other methods, as long term readers know. Besides the Put to Call ratio, which I like a lot as an indicator of a pending reversal in the market, I also like to use Price/Volume with the emphasis on Volume movement. Today's chart below shows the Dow 6 month Price and Volume movement over the period.

What you will notice from the above chart is that the Volume has been steadily declining over the period. That's the first note worthy piece of data. In fact in the month of December we are at the low on the chart. Even July had much more volume than did December and most are on vacation then.

The other noteworthy consideration is that the price has all but gone steady up on this lower Volume. First rule to observe in trading is that if you have price rising, volume needs to also rise if you want to have a Bullish condition. But if the price is going up and the Volume keeps dropping, as it has especially lately, it is a very bearish sign. Also note the number of recent days which have been distribution days, in red, versus accumulating days, noted in Black on the Volume chart.

To me the signal couldn't be more emphatic. This indicator is flashing RED in Neon lights. Does this mean that next week the market will tank? No, but it should make you wary as to how much you are invested in the market rising right now. There is better than a 50% probability that the market will be turning down soon. It is way overbought by any measure you use. Buyer be Ware! Don't say you didn't know. And ask yourself how can all the prognosticators except one, be on the side of the Bull at this time. And don't tell me it's the Fed. They only have so much they can do.