Charts and Commentary

By: Marty Chenard | Fri, Oct 13, 2006
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Two weeks ago, there was plenty of business news discussions about a recession, soft landings, and hard landings. Now those discussions have disappeared into oblivion. The DOW is making new highs, and is seriously divergent with the NASDAQ Composite at the same time. We have an inverted yield curve and this time ... it doesn't matter.

The talk about housing was that it was going to have a hard landing. This week, Greenspan made the comment that he saw indications that housing was turning around. Also this week, D.R. Horton's president said that new home cancellations are still coming in and have not stopped. (D.R. Horton's net sales orders were down 25% while their cancellation rate was 40%.) Who's right ... D.R. Horton or Greenspan?

What's behind the market up move?

The two big things are ... Liquidity and short covering.

1. The Fed continues to pump M3 liquidity at a high level. The second year presidential stock market drop didn't happen (at least not yet). The two previous second year presidential periods both showed down trending and negative Liquidity levels. This one is showing up trending and positive liquidity levels. This is fuel for the market.

2. Just weeks ago, the New York Stock Exchange had its highest "Short Interest Ratio" of the past 5 years. As strong liquidity has been pouring in, it has been sending NYSE Members into a short covering scramble as they try to unload billions of shares. This is driving the market up as these stocks are being bought back. They have been buying back "billions of shares" to cover their short positions.

-- There are two popular market-media opinions right now. 1. That we are going to have a soft landing or no recession at all, and 2. That the market is an undervalued bargain right now.

I checked some of the current comments at Comstock Partners and what Ned Davis Research was saying at this link: (They believe, based on a 56 year study, that the market is actually significantly overvalued.) http://www.comstockfunds.com/

Does it really matter who is right?

Right now, it doesn't, unless ... The Fed cuts Liquidity inflows, or until there is some bad market/economic/political news, or until short covering is over and no NYSE Member wants to buy at prices they pushed stocks up to in exiting positions.


Day 2: What is happening on the price trending for the "core holdings" owned by Institutional investors?

*** We reported on this yesterday, and today's updated chart is below.

Below is a 7 month chart showing our Institutional Index.

Three distinct patterns have occurred since April.

1. From April to late June, the Institutional index had a down trending Channel that was a wide channel.

2. From the end of June to late August, the Index had a rising wedge pattern. It broke the rising wedge to the downside.

3. In late August, it immediately rebounded up from the rising wedge drop and formed a very thin and narrow rising Channel with a high angle of ascent.

This tight channel has had the index's price bounce off of the channel's resistance 9 times since then, and it had successfully held the Channel's support line 4 times.

This is a hard angle of ascent to hold over a long period of time.

The question is ... How long can this channel hold its rise before breaking support?

*** Yesterday, the Institutional "core holdings" index had a sharp rise up toward its upper channel's resistance line and will likely retest it for the 10th time in the next few days.

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Marty Chenard

Author: Marty Chenard

Marty Chenard
StockTiming.com
Asheville, NC 28805
Tel: 828-296-1200

Marty Chenard is an Advanced Stock Market Technical Analyst that has developed his own proprietary analytical tools and stock market models. As a result, he was out of the market two weeks before the 1987 Crash in the most recent Bear Market he faxed his Members in March 2000 telling them all to SELL. He is an advanced technical analyst and not an investment advisor, nor a securities broker.

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