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On the heels of a well attended and superbly run client seminar, when I entered the ballroom before speaking, the air was thin. All attendees recognized, including this writer, the turbulent times that were occurring in the U.S. and global stock markets.

I likened the prevailing sentiment in the room, which I’ve have to believe was a very good representation of the majority of Wall Street participants, somewhere between the “capitulation” stage and “despondency” stage. This is depicted on the following chart, of investor sentiment, at different points of a market cycle. Let me add, I have no idea how long each stage lasts.

A few of the phrases on the chart were added. However, Arrow Funds is the source of the chart.

When you look at the following two charts of the Dow Jones Industrial Average (DJIA) and S&P 500 Index (SPX), can you really blame them?

In looking at the previous charts, I will make the case that within the context of an intermediate-term down trend and under the assumption that intermediate-term changes in trend start with subtle, short-term changes in trend, I believe the DJIA and SPX are still undergoing an underlying base-building process.

In other words, the SPX and DJIA are attempting to work through a “bottoming” process. The operative word here is “process.” Please think about how long it took for the “chart damage” to get repaired following the decline of 2000 to 2002/2003 and the 1987 decline. It takes time and patience, especially in light of the technical damage that has occurred since the NYSE Advance – Decline Line topped out in June 2007, for basing patterns to develop and, in turn, identify new and emerging “leaders.”

This does not mean that I expect the stock market to go straight up from here. I’m not talking about a new bull market, but rather one in which, within the context of managing risk, we can look to make some money in the short-term and / or hedge, reduce, or sell positions that continue to show poor relative strength. In other words, use this time period as an opportunity to upgrade portfolios.

The upper-end of the current trading range pattern (resistance) for the SPX is between 1007 and 1048. Similar resistance figures for the DJIA are between 9616 and 9800.

As a side note, when you look at the “internal market figures”, which was recorded on October 10, 2008, I believe the stock market experienced capitulation type activity (please refer back to the Sentiment chart) on that day.

Additionally, on 11/13/08, when the DJIA and SPX “retested” their price lows from 10/10/08 (the DJIA came within 83 points and the SPX marginally undercut the low), the selling pressure was not as heavy as what is shown in Table 1. This is positive, especially when you combine it with a relatively high volume one-day “Outside reversal” pattern, exhibited by the SPX and a number of other market indices on that same day.

“But Art, how can the stock market not fall further as the economic conditions are awful?” I am of the opinion that the stock market has a tendency to move ahead of the economy. Some say the lead time is four to six months, others say six to nine months. Whatever.

Following is a chart that Wall Street veteran John Murphy showed on the Stock Charts Website, concerning the relationship between the stock market (red line – if you print this out, the red line would be the lowest line starting in the bottom left corner of the chart and curving up to the right and then peaking first) and the economy (green line - if you print this out, the green line would be the upper line starting in the middle left portion of the chart, trending down to the right, curving up to the right and then peaking second ).

“The legend along the bottom shows that the market usually peaks while the economy is still in recovery. The bottom legend also shows that the market bottoms while the economy is still in recession. That means that the market will bottom while the economic news is still bad.”

Finally, in my opinion, all analyst need to ask, What happens if I am wrong? If I am proven wrong and the DJIA and SPX close below their respective 2008 support levels (refer to the charts on page two) and the selling pressure is greater than what occurred on 10/10/08 (please refer to Table 1), THEN the current “bottoming” process will be nullified.

At that point, the odds would favor that the stock market indices make a bee-line towards their respective 2003 – 2002 lows.

Interestingly, the 2003 - 2002 lows for the SPX are only another 3.5% to 6.1 % from its 11/13/08 intraday low. For the DJIA, the difference between its 10/10/08 low and those recorded in 2003 to 2002 is 4.4% to 8.6%.

Friday Morning 11/14

These comments are one man’s attempt to put some “flesh” on yesterday’s tape action.

Within the context of an intermediate-term down trend, “V” type bottoms (straight down and straight up – a function of price only) are rare and bearish.

However, within that context, a healthier “bottoming” pattern looks like a “W” (a low-rally-retest sequence, which is a function of price and time). This is what yesterday’s tape action was all about as the DJIA was down over 315 points at one juncture yet closed higher by 552 points.

Yesterday was another piece of the puzzle in the stock markets almost five week attempt to stabilize and establish a short-term floor.

Price or chart wise, the October 10 lows were tested and, in the case of the SPX, marginally under cut. Then there was a huge one day reversal, which a technical analyst would identify as an “outside” session. Chart wise, the stock market is finding a floor in price and building a base.

Volume (1.94 billion shares on the NYSE and 7.6 billion Composite shares) was heavy on a relative and actual basis.

Sentiment wise, I think we saw capitulation on October 10 (in a longer report later today, I’ll include a graph of sentiment and you can see where we stand) and the news continues to be awful. Yet the October 10th lows were not violated by the DJIA and the OEX.

What Would I Like to See Going Forward? I don’t think this is the start of a new bull market, but the development of a short-term trading range pattern. However, similar to the fact that a heart attack patient doesn’t immediately run a marathon, but instead must simply start walking again, so it is with the stock market. A trading range pattern is a step in the right direction.

The upper-end of the current trading range pattern (resistance) for the SPX is between 1007 and 1048. Similar resistance figures for the DJIA are 9616 and 9800.

What I’d like to see over the next few days is a low volume pullback or consolidation period that is accompanied by good internals.

On the upside, I want to see rallies that are accompanied by fewer new 52-week lows, an expansion in new 52-week highs (this will be very difficult but it will be a good guidepost for identifying new and emerging “leadership”), good Advance – Decline readings, and on “up days” an expansion in volume from the previous day.

What Happens if I am Wrong? If I am proven wrong and the DJIA and SPX close below their respective 2008 support levels (please refer to the longer-term report due out later this morning) and the selling pressure is greater than what occurred on 10/10/08 (please refer to my 11/13/08 report), THEN the current “bottoming” process will be nullified.

At that point, the odds would favor that stock market indices will make a bee-line towards their respective 2003 – 2002 lows.

Interestingly, the 2003 - 2002 lows for the SPX are only another 3.5% to 6.1% from its 11/13/08 intraday low. For the DJIA, the difference between its 10/10/08 low and those recorded in 2003 to 2002 is 4.4% to 8.6%.

How Would I Tactically Handle The Current Situation? Within the context of implementing a stop loss strategy, first and foremost, I prefer to stay with areas of the market that are showing strong relative strength. That would include Telecommunication, Health Care, Consumer Staples, and Utilities.

However, if you want to take a “barbell” approach and look at a beaten-down sector, I would look at the Energy complex, which is showing improving short-term relative strength.

The Oil Service Index (OSX) and Natural Gas Index (XNG) have remained above their October 10 / October 28 lows, while Crude Oil continues to set new reactionary lows. This is positive divergence and the exact opposite of what I identified last summer.

Thursday Morning 11/13

Day number six of the most recent pullback and I thought it would last five days, max. To borrow a statement used by the real estate participants, namely “location, location, and location” and put my own twist to it and apply it to Wall Street, I say “confidence, confidence, and confidence.” I think I could also throw in “confusion, confusion, and confusion.” Did Mr. Paulson’s discussion about changes to the TARP program instill or weaken the “Streets” confidence in the plan and in the administration? Did it create more confusion? In the interest of fair disclosure, traders and investors want to know, “How really bad are things?” Along this line, what did the lowering of guidance by BBY ($23.59/Strong Buy) (an electronic retail firm) due to the confidence factor surrounding the technology space? How about the corporate news last night from INTC ($14.43/Strong Buy)? When you combine these fundamental variables with a violation of the 11/16/08 low on Tuesday by the major indices and a move above resistance yesterday by the Volatility Index (VIX), the stock market cast its vote. The DJIA fell 411 points, the NASDAQ shed almost 82 points and a number of other market indices declined “in and around” 5%. On the NYSE, volume expanded to 1.43 billion shares. Declining volume swamped advancing volume by a 25-to-1 ratio. There were 2675 net declining issues and 546 new 52-week lows. The Oversold-Overbought Oscillator ended at minus 3.7.

In terms of another market-moving variable, here is a portion of something Jim Brown wrote earlier in the week, on the Website Option Investor:

“The Nov-15th hedge fund notice day is also going to be a major event. If investors want to withdraw funds on Dec-31st they need to give notice by Nov-15th. Otherwise their next withdrawal window will be March 31st...If funds receive a wave of redemption requests by Nov-15th it does not mean selling next week will crush the markets. It means there could be persistent selling through the end of December as funds raise cash. However, funds have already raised a significant amount of cash with an average cash position today at 30% in anticipation of further withdrawals. This suggests a calm notice date without any upsurge in withdrawal requests could actually result in a positive market as that money is put back to work.”

Speaking of selling pressure and confusion over the TARP plan, the S&P 500 Financial Sector Index (GSPF) broke down again yesterday. Unless the breakdown point is quickly recaptured and held, this doesn’t bode well for the market and implies a full-fledged retest of the October 10 levels. Consistent with this, I agree with a tactical suggestion given by Dorsey-Wright recently. Specifically,

“All stocks are worthy of review at this point to make sure you have a point at which you are going to take action if things go wrong. This may be a new sell signal in a stock or it may be a violation of recent lows or the October lows. The point is that you want to have an exit strategy in place in case the market or your stocks move through your stops.”

Conclusion

Price wise, please realize that additional “retesting”, possibly multiple times, of the October 27-28 / October 10 lows (there was, in my opinion, clear capitulation on October 10, 2008 – see bolded figures on page two) is a high probability event.

Do I want it to happen? For the sake of many accounts that are over weighted in losing positions, no, I do not. Would it be healthy if there was a series of “retests?” Yes, it would be healthy because 1) it would lead to the development of a bigger base, ala 2002-2003, 1998, 1987 and 2) it would likely increase the “fear factor” and move traders and investors sentiment closer to the “despondency” stage.

Following are the late October (listed first) / October 9 - 10 (listed second), internal market readings. I will to gauge any current or further retest against these readings. I want to see less selling pressure on the “retest” than what was recorded on the previous low points, as was the case in October.

Also, please realize that from a price perspective, a “retest” can occur slightly above or slightly below (this is ideal because it creates more fear) the previous low point.

I have purposely only listed the internal market data in the row that begins with the DJIA.

Tuesday Morning 11/11

Opening strength that doesn’t hold, then gets sold and ultimately leads to lower prices, is both discouraging and in this case, negative on a very short-term basis. The negative news items surrounding several stocks completely overwhelmed the “stimulus” news out of China, combined with the comments from the “G 20”. Consequently, after the DJIA tacked on a quick 216 points to the upside, the “senior index” proceeded to record an intraday pattern of “lower peaks and lower troughs.” With approximately 30 minutes of trading left the DJIA was down approximately 183 points, finally closing with a loss of 73 points. NASDAQ, following an opening gap to the upside, recorded a similar intraday pattern and by the close, lost almost 31 points.

With clients now receiving their monthly statements, leading to further consternation and selling, I would expect more of this type of intraday and day-to-day volatility as we approach year-end. On the NYSE, volume contracted to 1.13 billion shares. There were 1153 net declining issues, not a good reading.

Conclusion

First off, so as to avoid any further confusion, let me try this again: “In order to gauge how to handle your short-term positions, please use last Thursdays (11/6/08) intraday low accordingly.”

“Here are the lows from 11/6/08: SPX = 899, DJIA = 8637, NASDAQ = 1603.”

Also, here are additional support levels: SPX = 845 (10/28/08 low), 839 (10/10/08 low).

I have recently received a number of requests concerning the U.S. market. Specifically, “How is the U.S. market trading relative to foreign markets?”

Using relative strength analysis, shown on the following pages is a relative strength line of the U.S. market, as defined by the SPDR S&P 500 Exchange Traded Fund (SPY), versus a number of other ETF’s representing various overseas markets.

In this case, relative strength measures the price performance of a country index (the U.S.) versus another country’s index. A country’s relative strength can improve if it rises more than the other country in an uptrend, or goes down less in a downtrend.

In summary, please understand what I am saying here. I am not saying that the U.S. market won’t decline. What I am saying is that based on relative strength analysis, the odds favor that from a longer-term perspective, the U.S. markets will decline to a lesser degree than foreign markets and rally to a greater degree than foreign markets.

Thus, within the context of managing risk, the U.S. market is the market of choice.

Monday Morning 11/10

Following a massive two day pullback by the DJIA last Wednesday and Thursday (down almost 930 points) during which the Volatility Index (VIX/56.10) rallied right to, and stalled at, resistance (65), market indices said “enough” and ignored poor economic news (employment report) Friday. Consequently, the DJIA rallied 248 points and the NASDAQ gained almost 39 points. On the NYSE, unfortunately volume contracted to 1.22 billion shares. There were 1186 net advancing issues, not a great reading, but in light of the 190 point surge in the last 35 minutes of trading, I’ll deem it “in-line.”

I received a number of questions last week at the regional conference I attended concerning Crude Oil ($61.04). The bottom line is that Crude Oil has pulled back to a critical area of support, as shown below, of $60.00. Use a close beneath $59.97 if you want to be exact. The fact that the trend line hasn’t been violated is a good sign. Some base-building or lateral action would be viewed very favorably going forward!

Initial resistance exists just under $72, just over $76, $78ish and then closer to the declining 50-DMA, currently at $86.64.

A close below support would increase the odds of visiting the $50 area. Consistent with this, besides stock specific stop loss points, accounts should use Crude Oil’s support level as an alternative stop loss point.

Other questions / statements I received multiple times at the regional conference last week were:

“Art, my partner said you were looking for a pullback. Is this (the two day decline) what you had in mind?”

My response was, “While I thought it would occur in a few days (two to five), I didn’t expect over 900 points in two days.”

You gave support levels (and resistance) for the SPX, DJIA, and NASDAQ in your report Thursday morning. The 50% retracement level was violated at the close Thursday. My clients don’t want to ride back down to another possible retest of the October support lows. What should I do?”

My response was, “Use Thursdays (11/6/08) low as a new point, from which to gauge how to handle your short-term positions.”

I will end this by pointing out that relative to the October 10 and October 27/28 lows, last weeks sell off occurred on less selling pressure, as defined by the number of new 52-week lows and total volume. While the “point plunge” and volatility was brutal, the downside pressure wasn’t as bad.

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Weekly Technical Commentary by Art Huprich

Friday Afternoon 11/14

Friday Morning 11/14

Thursday Morning 11/13

Conclusion

Tuesday Morning 11/11

Conclusion

Monday Morning 11/10