Is That a ‘V’ Bottom or the Dreaded Double-Top?

by Sam Collins | July 18, 2013 7:32 am

Is That a ‘V’ Bottom or the Dreaded Double-Top?

Despite reassurances that the Federal Reserve has no immediate plans to ease stimulus, stocks closed only slightly higher Wednesday. Chairman Ben Bernanke emphasized that decisions would be flexible and depend on “incoming data,” which measures inflation and other economic results.

Housing starts for June hit an annualized rate of 836,000 units versus an expected 958,000. There were no surprises from the Fed’s July Beige Book, which showed that housing was running at a “moderate to strong” pace and wage growth was “modest.” It also noted that the Chicago and Richmond districts reported a solid demand for part-time workers.

At Wednesday’s close, the Dow Jones Industrial Average was up 19 points to 15,471, the S&P 500 rose 5 points to 1,681, and the Nasdaq gained 12 points at 3,610. The NYSE traded 676 million shares and the Nasdaq crossed 372 million. On the Big Board, advancers exceeded decliners by about 2-to-1, while on the Nasdaq, advancers were ahead by 1.4-to-1.

07 18 13 spx 300x189 Is That a 'V' Bottom or the Dreaded Double Top?
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07 18 13 dji 300x188 Is That a 'V' Bottom or the Dreaded Double Top?
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chart key 300x84 Is That a 'V' Bottom or the Dreaded Double Top?[1]

The charts of the two most-followed quality indices look very much alike — they are both neutral. After a stunning rally both have slowed to a snail’s pace, even after Bernanke’s encouraging testimony and his assurance that the Fed would still take a dovish approach.

And technical analysts are divided, though most are bullish, on the final outcome of the current struggle between the bulls and bears.

The bulls win favor simply because other, more speculative indices (Nasdaq, Russell 2000, etc.) have already broken out of “V” formations. In other words, the “tape action” is still strong and favors a breakout.

But prominent analysts, like Jeffrey Saut of Raymond James, see a double-top forming. Furthermore, Saut calls for another “Black Friday” tomorrow (that’s pretty specific!). He points out that the equity markets are “very tired” after the longest “buying stampede” in 50 years. This is now day 154, while the second longest was just 53. Basically, he says, we are “outta time, outta momentum, outta leadership.”

Conclusion: I, too, am cautious, though bullish, since all trends still point higher despite the fact that our internal indicators are very overbought, telling us that stocks are due for a bit of profit-taking. So here’s to standing on the sidelines until Mr. Market tells us of his next move. Either way, cash doesn’t result in a loss.

Today’s Trading Landscape

To see a list of the companies reporting earnings today, click here[2].

For a list of this week’s economic reports due out, click here[3].

Endnotes:
  1. [Image]: http://investorplace.com/wp-content/uploads/2013/05/chart-key.gif
  2. click here: http://online.wsj.com/mdc/public/page/markets_calendar.html?mod=topnav_2_3024
  3. click here: http://www.briefing.com/Investor/Public/Calendars/EconomicCalendar.htm

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