Market Analysis for Feb 13th, 2004

Bulls Showing Vulnerability
By Mike Paulenoff,

Today's action in the E-mini March S&P turned out to lay a nasty trap for everyone. After Wednesday's sharp upside move off of Greenspan's testimony, yesterday we had a little bit of a pullback, and it looked like that pullback ended late yesterday on the close.

The market opened higher today and despite some lukewarm economic data on trade balance and consumer sentiment, it looked like the market was just going to shrug that off and stay buoyant into the long weekend.

As it turned out, the E-mini March S&P ran up to just beneath its post March 2003 recovery highs this morning, running up to 1156.75, but that was just beneath yesterday's high of 1157 , and just below Wednesday's high at 1158.75 after Greenspan's testimony. Instead of taking that out, for no discernable reason a wave of selling pressure hit the tape. Before you knew it, the E-mini March S&P had plunged from the 1156 area down to 1142.

Since that low was established, which has been about 3-4 hours, the index has only been able to rally from around 1142 to 1146 , or so. On a near-term basis, the pattern is carving out what looks like a bearish profile that has more selling pressure to go.

On a more intermediate-term basis, today's decline below 1147 is meaningful, and it overlaps the last consolidation we had on Monday and Tuesday this week before Greenspan's testimony on Wednesday.

(Regarding our time frame, micro refers to intraday, near-term about 1-3 days, and intermediate-term anywhere from a week to 3 weeks.)

So we are back right at or just below the level at which the markets were resting when Greenspan took the microphone on Wednesday. The inability of the March S&P to rally into the close would argue that today not was only a weak profile but failed to make new highs as well, and instead reversed to the downside.

So there is at least some suspicion that the bulls are showing that they're vulnerable right now to some profit-taking or to a correction.

Certainly, the action that transpired today from a more intermediate-term basis does not bode well and suggests perhaps that this most recent advance from 1120, which was at the end of January, into Wednesday's high at 1158.75 is complete.

The key level, though, we have to look for on the way down, if there's more selling pressure, is into the 1137 to 1133 support area. That's the critical area. If we take out 1133, then my work will become increasingly bearish intermediate-term and suggest not just that we're going right back to 1120 to test support, but that 1120 will break and we will quickly then approach a test of the rising 50-day moving average, which is in the vicinity of the 1108-09 area as we speak.

With regard to the QQQs, the Qs and the Nasdaq have carved out a different pattern over the last three weeks from the S&P. Keep in mind the S&P made its post-March 2003 highs this week, whereas the Qs made it on January 20 at 38.85. We went from 38.85 on January 20 to 36.32 on February 4, and to me that looked like a completed downleg in a large or intermediate-term correction that needs more selling pressure to complete.

We've had a rally which took us from 36.32 to 37.70, and that's where we failed this week. As we speak, the Qs are at 36.97, so let's call it 37 even, which is a significant intraday resistance area.

If the Qs cannot move back above 37.10 before the close and instead sell off, then I think we're gong to 36.60 on Tuesday after the weekend. If 36.60 breaks, which is basically the 50-day moving area, then I think the Qs will pick up steam and head for a critical test of the prior significant pivot low on February 4 at 36.32.

It is that test, if it should come to pass, that will be the most critical test of this bull market since the August lows. If 36.32 fails to hold the impending weakness, then I think you will see the Qs move swiftly down through 35 into the 34.40 area for its next critical test.

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