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With the
market down nearly 100 points yesterday, it might be
hard to find a silver lining. The good news is that the
market dropped like a rock on the opening and stayed
there.
Prices
move in a world that is dominated by buyers and sellers.
More buyers make the prices go up; more sellers and
prices fall. The market has fallen for nine days, losing
value that took nine weeks to gain. Prices always tend
to fall faster because selling is a more of a herd
reaction than buying into the market. Virtually no
emotional commitment is made when an investor sells,
whereas buying does require a commitment beyond the
money.
In a
down market, obviously, there are more sellers than
buyers. Today, though, we saw an equilibrium between the
buyers and sellers at around 100 points down. And before
the market can go up again, it must stop going down.
Have we reached a point of turn- around? These are the
two scenarios of what will happen next.
Theoretically, a bottom is reached when everyone that
wants to sell has liquidated their positions. But that
also is not a simple process. Assume for a moment that
3,250 is the floor of this decline and from yesterday,
we are going up. I know that may be a big assumption
right now if you lost a bundle these last two weeks, but
it is a viable picture.
So
yesterday was the end of this recent bloodbath. However,
there are still shareowners who want to get out and will
sell into any price rally. Buyers may have gained a
slight amount of strength, but they are not going to buy
at higher prices as long as there stands an unknown
quantity of selling pressure waiting in the shadows.
If a
20-point rise (or any price rise, for that matter)
occurs and sellers then move in, the buyers will walk
away quickly until the selling pressure stops. The
market could actually fall significantly below
yesterday’s close.
Yet, at
some point, sellers will mostly disappear and prices
will rise. The analysts will call it bargain hunting.
From the point where sellers move aside, the market will
move in a stair-step fashion, three up, two down, back
to where selling pressure again comes in, whether at
3,400 or 4,000 or whatever.
It is
difficult to pinpoint that level. The best that most
technical indicators can do, no matter what anyone says,
is to tell you whether the market is losing steam,
strength, momentum on the buyer-dominated or
seller-dominated side.
It is a
fairly easy equation since there are only two options.
Either buyers dominate the trading or the sellers do. If
the buyers walk away, as happened nine to 10 days ago,
then all that is left in the market, and in the
equation, is sellers. Prices fall. The opposite is also
true, and then prices go up.
Now the
“going-down” scenario. Recently, buyers left and then
sellers took over the action. However, not everyone who
wants to sell liquidated and jumped to the sidelines.
Some are assuming that prices will rebound a little and
are waiting for the chance to get out. They will sell at
the first opportunity they have at higher than
yesterday’s close, and the market will fall more.
The
timing for the recent decline may motivate buyers to
wait until the corporate earning numbers for the second
quarter are digested and some forecast for this third
quarter become clearer. Although the macroeconomic
picture is still favorable, there are some fiscal
concerns that will play out over the next 30 days or so.
Buyers
will refrain from making any substantial investment
until they are reasonably sure that the selling pressure
is over. They will bide their time, knowing at some
point that this will happen, but will continue to be
unwilling to commit. It is in the buyer’s best interest
to be cautious, as all they are losing is time and not
opportunity. If the enthusiasm for selling evaporates,
they can always get back in, perhaps even at lower
prices.
Some of
you told me you fully liquidated your holdings last
week. Others held for yesterday and may or may not have
gotten out. Others are waiting and hoping that this drop
is over.
If you
are still in the market, let me point you to 3,270, a
few points higher than yesterday’s close. I see this as
a pivot point. I am assuming the market goes up to
3,270. If it does, hold your breath because what happens
at this level will give a strong clue to the future.
Obviously, the absolute critical level is 3,400. A break
above 3,400 probably means we are back on track for
higher prices. A failure at 3,400, and all bets are off.
If the
market does not retrace very quickly to 3,270 and
higher, you can easily forecast 3,200 (not that far
away, unfortunately), and then 3,000, 2,800 and beyond.
3,400 is the level around which our stock market turns
for good or bad, and right now, we are on the dark side.
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