Securities Research Services

Saturday, October 25, 2008

Continued Distribution Takes Place

Last week the major indices tested October lows. Unfortunately for those looking for a bounce, there is no sign yet that the selling is letting up or that buyers are ready and willing to step in and support the lows put in earlier this month.

In fact, what we are seeing instead is continued distribution and continuation set ups.

Let’s take a look at the intraday chart on the SPY for an example of what is taking place almost across the board.

Note that following the big up day on October 13, which can be seen on the chart above as the first wave up, prices have consolidated in a contracting continuation pattern.

Generally these patterns resolve themselves in the direction of the trend and indeed, on Friday, it did resolve to the downside.

This appears to be the beginning of a fresh leg lower.

The only qualification that needs to be made here is the acknowledgment that the market is just so oversold here. The breakdown of this continuation pattern could potentially be a headfake that squeezes new short positions. But, there is no reason to conclude that it might be a headfake other than the fact that the market has supposedly already traveled far enough. We have no evidence that it has and all indicators are showing continued distribution here so probabilities are higher that the breakdown was real and that we will see lower prices from here.

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