Free Newsletter: Stalking Stocks with the Shark - Stocks Continue To Pull Back - 8/3/08

Free Newsletter: Stalking Stocks with the Shark - Stocks Continue To Pull Back - 8/3/08

Greetings Shark Investors:

Although the major indices finished off the worst levels of the session, the market limped into the weekend on Friday as it continued to pull back from overhead resistance. Following the previous day's abysmal close, indications were for a lower start to the day on the heels of an astonishing second quarter loss of $11.21 per share from GM, $8.54 lower than had been expected. Although disappointing earnings news from other influential companies such as JAVA and NYX also weighed on sentiment, the index futures got a big boost an hour before the opening bell following a slightly better than expected reading on the monthly jobs report, which showed that the economy had lost 55,000 versus an expected 75,000 loss.

However, even though the averages were able to start the day slightly north of the flat line, sellers hit the minor opening strength hard, sending each major S&P sharply lower in the first few minutes of trading. Unfortunately for the bulls, the move lower accelerated shortly thereafter after news that Israeli Deputy Prime Minister had said that Iran was "on a path toward a nuclear breakthrough" sent oil prices about 3% higher in the matter of a few minutes.

That move, however, proved to be quick, because just it began to lose a bit of steam, the pressure was on for the commodity once again as investors used that pop to unload long positions and/or push some short positions. As such, oil began to back off and the averages started to stabilize at what would turn out to be the worst levels of the session.

From that point on, the indices were able to drift a bit higher as the weekend approached and the action died down considerably. Energy names spent the rest of the session working their way lower while materials, industrials, tech, staples and consumer discretionary simply drifted sideways. However, news that LEH had announced further efforts to delever their balance sheet and unload about $30 billion in mortgage-related assets in a move similar to the one MER had pulled earlier in the week pushed financial stocks higher straight into the close. The net result was a veritable standstill for the broader market, with the indices losing an average of 0.5% on breath that was about as flat as you can get and volume that was average, but on the light side.

Without a doubt, the ability of this market to put in a higher lower earlier in the week was a definite positive, but short-term overhead resistance has proved to be a difficult thing to overcome. The bulls have a few things going for them right now as the greenback has found some support, oil, despite being very news-sensitive, is being sold on strength, and financials continue to attract bottom-fishers. Even the recent economic data, while not encouraging, still isn't at levels typically associated with a more significant slowdown.

Be that as it may, the major indices have yet to show any real technical improvement. Sure, we're off the lows still, but the averages have been forming what is known as bear flags – a pattern in which stocks rise in an ascending channel with parallel ascending support and resistance trendlines while in a broader downtrend on decreasing volume. While such technical formations aren't necessarily useful from a "predictive" standpoint, they do give important insight into investor psychology and are worth our attention.

The bottom line here is that the ball continues to be in the bulls' court, but sooner or later, they are going to have to step up to the plate, show some conviction in their buying, and push the averages past short-term resistance on volume. If they can so that, then maybe we can start talking about a more sustainable counter-trend move.