Monday Update
It Could Get a Little Ugly
8/8/2005
by David Yu
NYSE Composite almost broke even today; it was down by only 0.01%. In the process, it also brought the TRIN Index down from Friday's 1.11 to below 1 today. Generally speaking, TRIN below 1 is considered bullish, that is, if we only engaged in mechanical chart reading. Knowing the way the TRIN Index is constructed, we know that falling below 1 on a down day, which had more declining issues and declining volume, is actually quite bearish. It shows the weakness in the breadth of the market - too much concentration on a few advancing issues while the rest of the market slid. The top 15 net gainers on the Big Board today showed us exactly this market breadth weakness.
Chart 1
The top 15 net gainers were all basic materials and energy related except for Whirlpool (WHR - Appliances) and Alliant Techsystems (ATK - Aerospace). Without the energy and the basic material sectors, NYSE would've suffered bigger loss today.
Chart 2
When the TRIN Index falls below 1 on more declining issues than advancing issues, it usually leads to more serious declines. The most recent example was the 10-point upday on 8/3/2005. The TRIN Index was 0.93 on 8/3, and the market seemed unstoppable at the time. Without looking at the market internals, it would've been easy to assume that the uptrend was going to continue. But the low TRIN reading on more declining issues led to the Big Board's 51.36 point loss on 8/4/2005 and 61.89 loss on 8/5/2005. In fact, 8/3/2005 may be marked as the day the "Summer Rally" of 2005 ended.
So, it could get a little ugly in the next day or 2, or 3....
--- [Here are additional notes appended later on Monday, 8/8/2005]---
However, it's also possible that the 10-year bond yield could run into resistance at 44.11 - 44.50 area, and starts retreating a little or moving sideways. Coupling this lower interest rate with a possible pull back of the price of the crude, it may just provide enough breathing room for the market to bounce back.
Chart 3 below shows that if we used the second trough for the calculation instead of the 38.03 intraday low on June 3, then 44.11 is a probable target as a result of its recent "mini" double bottom formation. In addition, when the yield gapped up in early March, 44.50 was the upper range of that gap. This should now serve as a valid resistance. If the yield fails to ram through this resistance and close above it in the next couple days, then the market's likely to bounce back. On the other hand, if the yield did break through, then it should get on its way to the next target at 46.93. And, that could really add insult to injury.
Chart 3
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