Free Newsletter: Stalking Stocks with the Shark - Low Volume Bounce Into Resistance - 08/27/08

Free Newsletter: Stalking Stocks with the Shark - Low Volume Bounce Into Resistance - 08/27/08

Greetings Shark Investors:

Although they finished off the highs of the session, the major indices were able to post solid gains on Wednesday in what predictably was another low-volume pre-holiday trading session. Following one of the most directionless sessions we’ve seen in a while, the news wires were quiet as we headed towards the start of the day, and indications were for a slightly lower start to the day. However, sentiment improved about an hour before the bell following the July durable goods report, which showed a month-over-month increase of 1.3% (versus expectations of an unchanged reading), while the ex-transportation numbers rose by 0.7% (versus expectations of a drop of 0.7%). Despite that, the index futures fell back towards the flat line, possibly in response to a spike in oil, which shot to well over $119 per barrel after posting gains of 1% earlier in the morning.

As such the averages began the day in mixed territory, bouncing between positive and negative territory for the first 45 minutes, but began to move higher as the weekly crude inventory report from the Department of Energy approached. However, even though those numbers were bullish for gas and oil – showing a draw versus an expected build in oil inventories, and a draw in gas inventories that was less than had been anticipated – equities showed little reaction, as the averages continued to climb to their best levels of the morning.

After that, the market spent the next 90 minutes basing out, but another wave of buying kicked in just as we entered the New York lunch hour, sending the market to what would turn out to be the highs of the day. While the resource sectors continued to sport solid gains, most of that second push was driven by financials. But by that time, all of the major S&P sectors were well into the green.

From that point, the air began to slowly come out of the market, with the averages giving up about half of their respective advances by the time we were mid-way through the final hour. However, the bulls were able to make a final push into the close, closing the indices with average gains of 0.82% on breadth that, while off its best levels of the day, still showed more than two stocks advancing for every one that declined. Volume, however, was once again incredibly light, with the number of shares that exchanged hands on the NYSE again at the lowest level of the year.

That said, the market undoubtedly had a positive bias, and while it remains dangerous to read anything into the action when we are dealing with such a thin trading environment, that bias allowed a number of individual stocks to act well between the bells. Of course, at the same time, market commentators could barely restrain their delight during the day. Not only did the market move higher, but they had a convenient excuse – the durable goods report – to explain away the action.

However, unlike the serial bottom-callers who seem to never tire of predicting major turns and making bold calls, we have absolutely no idea how long this market will continue to struggle. All we can go on is the action that we see in front of us on a daily basis and the technical condition in the major indices. While there were more stocks that were “working” today, we can’t help but notice that the averages were turned back right at the developing descending resistance trendlines that we’ve been talking about over the past week or so.

The one thing we do know, however, is that, eventually, a new bull market will begin, and if individual investors can keep their focus on capital protection and continue to keep tight stops and short time-frames in a market that obviously continues to struggle, then they will be in a much better position to profit than those who keep on trying to peg an exact bottom. Perhaps the action over the past couple of weeks will turn out have built the sort of base from which this market can move higher once volume start to come back into this market, but the fact remains that we have a long way to go before the indices can even begin the hard work of attacking their primary resistance trendlines.