Wednesday, August 25, 2010

Why consolidation here is bad for the bulls?

Finally something to cheer for the bulls today as the markets bounced off multi-month support levels today. This bounce should come as no surprise to the readers of this blog as we knew that the markets were at oversold levels and the markets have continued to remain in this range for quite a few months now. Before moving forward, let's have a quick look at the charts. 

The S&P bounced pretty much exactly off the 1040 level. This level has given support now four times now in the past few months, making it a very important support level and a hard nut to crack for the bears.

The Russel 2000 level also bounced off the support level and there is also a positive MACD divergence developing here.

The story is a little different for NASDAQ, which unlike the above two indices broke through its support levels yesterday, which now becomes the resistance level. The index closed right at this level.

Though it was a very decent performance by the bulls today, it is important to remember the momentum still very much lies with the bears. This bounce was expected since as seen above, 1040 is a very important support level and it was highly improbable that the bears were going to break it from oversold conditions. What they need is a period of consolidation, before having another crack at this level. Remember, the more this level gets tested, the weaker it gets. If you are long, what you really want to see is a further leg up tomorrow. As pointed earlier, consolidation around this level would be good for the bears and not for the bulls, as it will allow the market to work off the oversold conditions. I like the odds of being long here, but would recommend keeping tight stops.

There will be no post tomorrow as I will be away on travel but I will try and come up with a watchlist for the next two days later tonight.

Take care and good luck!

1 comment:

Eclectic Linkfest said...

An excellent and finely nuanced analysis. Thanks for sharing your insights, and keep up the good work!