Happy New Year!
The Dow is down 8.2%, the S&P is off 9.3%, and the Nasdaq is down 13% on the year, but that's for the solar calendar year. The Chinese lunar calendar New Year, the Year of the Rat, had only just begun. According to the Chinese Zodiac, the Year of the Rat is the year of prosperity and romance. Notwithstanding the romance prospect, the first two days of the Lunar New Year appeared to have started on a positive technical note.
For the 2nd day in a row, the intraday Nasdaq market breadth showed subtle signs of improvement. Until they reach their extremities, the rising Up Volume and the falling Trin Index are the prescriptions for positive market momentum swings. Chart 1 below shows the widening gap between the intraday Nasdaq Up Volume and its Trin Index that led to the positive closing on Friday , as it did for the early morning rally.
Chart 1
Prior to the Lunar New Year's Day on Thursday, 2/7/2008, the market had moved lower in the final hours in three straight sessions (see red arrows on Chart 2 below). This negative trend was reversed on Thursday and then again on Friday (blue arrows). Short squeeze did not seem to be the probable cause for these late afternoon surges.
Incidentally, last week's formation provided us with a significant resistance at approx. 43.75 of the Nasdaq 100 ETF, QQQQ, give or take a few pennies. Its two prior attempts to break through this overhead resistance had all failed due to the absence of the volume support (see black arrows). Volume dropped off as soon as QQQQ reached the 43.75 level. It's worth noting whether the past two days' positive development would bring on sufficient volume this week to absorb this overhead supply.
Chart 2
In any case, the low short interest ratios of the Nasdaq 100's Big Eight, the 8 most heavily weighted tech stocks of the Nasdaq 100 Index, make them unlikely candidates for short squeeze plays (Chart 3 below). Therefore, the market breadth and the price recuperations of the last two sessions could actually have been driven by real demand. And nothing reveals demand better than the money flows.
Chart 3
Chart 4 below shows the divergence between the Dow Jones Wilshire 5000 Index, the broad market index, and the cumulative effect of the Uptick Trade Value relative to the Downtick Trade Value since the beginning of February. While various surveys indicated the general consensus that the market's on the 2nd leg down last week, this relative money flows indicator seemed to think otherwise. It had quietly rose above its January 3 high (black circle).
Chart 4
The Year of the Rat, however, is also the year of planning, cultivating, and accumulating for lean years that may follow. While there's no scientific evidence supporting this Chinese Zodiac cycle, even though it's been in use for the last 4,000 years, the excessive selling over the last two months and the prevailing doom and gloom sentiment make a contrarian wonder whether this year may turn out to be a positive year for the stock market. The tough time may not arrive till after this election year. There are certainly sufficient contradicting technical evidence supporting reasonable doubts.
