August 18, 2006 Stock Market Recap

Paul wanted me to talk about T2108 since it's now approaching 80. Duru did some analysis on it the other day and I don't really have much to add to what he wrote. For now I'm not too concerned about it. Once it actually hits 80 I'll start to be on guard for a top. As a general comment about these type of indicators though, they tell you when things are really getting carried away. On the down side, once it breaks 20, you know that even the "good" stocks are being dumped along with the dogs. On the up side, once it gets around 80 you know that traders, especially those damn day traders ;-) , are running up everything they can point their mice at. So once I start to see the garbage stocks rallying and T2108 is at or above 80 I'll break out the bear costume.

You can see why I like T2108 so much. It often helps to keep me out of trouble. On the June 13th recap I said:

T2108 is now in the buy zone, under 20. It closed at 15 today. Likewise, $SPXA50R, dropped under 20 today. Bears should not get too greedy right now.

The 13th just happened to be the 2006 closing low for the S&P 500.

On the June 19th I said:

I found a lot of shorts again tonight but once I saw that T2108 slipped back under 20 today (it's 17.46 now) I feel like I have to temper my bearishness. (Sentiment's pretty bearish too.)

It seems that sentiment is still quite bearish. Just check the recent blogger sentiment survey or read the comments over on the perma-bear blog. It looks like a good number of people would rather be right about the bear case instead of making, or not losing, money. If & when those bears start to give up they'll add more buying pressure to the market.

And on the 27th I wrote:

I'd be surprised if the market tanked without bouncing first. Of course it *could* happen but with T2108 still close to 20 I have a tough time being a super-bear.

It pays to have an indicator like that which you can factor in to your analysis.

On to the indices. They're all short-term extended and have overbought stochastics. While we know that overbought can stay overbought this isn't a juncture where I'd want to be initiating longs for swing trades. A dip or a bit of consolidation would make me feel better about putting on new longs. Perhaps we'll get a pullback now that expiration has passed.

The Nasdaq continues its Bollinger Band Walk. As I've said many times, get out of the way when you see a walk starting. That's a sign of a very strong move. We saw what the downward walk in May started...

The S&P is also levitating above its upper Bollinger Band.

The Russell 2000 stopped just short of its 200-day moving average again.

No changes today...