Monday, February 4, 2008
Super Tuesdays
by David Yu
The market reacted differently in the aftermath of last two Super Tuesdays (see Chart 1 & 2 below). In 2004, the market broke down a week after John Kerry wrapped up the Democratic presidential nomination. Rhythmic lower highs and lower lows throughout 2004 paved the way for a great number of fear mongers calling for the collapse of the stock market and the U.S. economy. Investors subscribed to their newsletters and literatures were so frightened that they missed out on next 3 years of great bull run. In 2000, the market ran up sharply one week after Al Gore and George W. Bush secured their respective party's presidential nominations on March 7.
Chart 1
Chart 2
Even though the market went in different directions after the last two Super Tuesdays, there were interesting similarities. Both Super Tuesdays were down days for stock market. If you intended to short the market tomorrow, you'd have the statistical probability on your side. The market also became indecisive after the primaries as though it's taking its time to assimilate the election data; it stayed range bound for 4-5 sessions after both Super Tuesdays. Psychologically, it's understandable that the market dislikes uncertainties; it tends to sell first when faced with uncertainty. Since human psyche never changes, similar occurrences of the past are likely to repeat. Were that the case, similar chart pattern (compare Chart 3 below with Chart 2) indicates this time the recurrence is likely to mimic what happened in 2000.
In both 2000 and this year, the market had a short-term rally after approx. 2 months of decline. Y2K marked the beginning of the end of a long-term bull market, and 2008 is considered by many to be the end of a 3-year bull run. So, we'll see how it all works out.
Chart 3
Meanwhile, the market appears to have over-extended in the short run. The fast line (red curve) of my Intraday Indicators Composite Index had surged into the overbought area above the red horizontal line (see Chart 4 below). Super Tuesday or not, it's likely for traders to take some profits off the table anyway. And, that's what happened today, on Monday. However, this short-term rally still appears technically intact.
Chart 4
This short-term rally has thus far formed an ascending triangle (see Chart 5 below), which is a bullish technical formation. Nevertheless, the horizontal blue line at approx. 46 level of the Nasdaq 100 ETF, QQQQ, represents the overhead supply of shares (sellers) that's preventing the market from breaking through. Once these shares have all been absorbed, the market will advance rapidly and easily. But, if demand starts to diminish before the market breaks through this resistance level, the price could drop precipitously out of pattern. Then, we'll have to redraw the scenario.
The other concern is the divergence of trading volume. Declining volume lends no support to any rally. Trading volume had thinned out considerably since the market rebounded from the January 23 bottom. Unfortunately, in order to have a sustained demand to absorb the above referenced overhead supply, the volume will have to increase along the way. We'll see if this would all change after tomorrow, Super Tuesday, when investors return from voting precincts.
Chart 5
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