Securities Research Services

Thursday, May 01, 2008

Downtrend Line Kissed Goodbye

Let's start off today with a recap of our recent analysis over the past few weeks. We have argued that the long term trend for the broader market is down, though the short term trend has been up. We also argued that when the SPY price moved up into the red zone on the charts we have been providing that the risk of reversal was extremely high.

Moving on…

Monday we noted that while the SPY still had some major resistance to deal with and that while a reversal was likely, that we had seen money flowing into the oils, steel, rail, and ag.

There has been little doubt that the SPY would turn back somewhere near its current trading zone, but it was unclear whether or not a bull trap would be set by a false breakout to the $141-$142 area.

Yesterday's reaction to the rate cut clears up a few things for us.

First, the money moving into the commodities represents the fact that traders were betting on a Fed that would cut interest rates, further exacerbating inflation in these sectors; indeed, they were correct.

Second, it now looks like the SPY is going to have a tough time setting up the bear trap scenario. With the inflation friendly rate cut the SPY sold off after tagging its falling downtrend. Not only did it sell off, but it did so on much stronger volume than the tiny breakout from last week has enjoyed.

It's pretty clear here that the market views the rate cut as damaging to the economy, which is already suffering from high gas, food, and other commodity prices.

One major question still is left unanswered, but we suspect we will get the answer real soon; when the broader market sells off, will it create a buying opportunity in the commodities as fund managers unload in a panic, or will commodities survive the panic this round and continue their journey higher unabated?


A bull trap breakout appears unlikely. We suspect that any early buying now will be faded as smart money puts on short positions.

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