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[Figas]

FRIDAY a.m.
July 18, 2003



Change of Character
by David Nichols

Yesterday at noon the market finally changed its bullish character.

The Philly Fed survey came in better-than-expected, which could have easily been a catalyst to ramp the futures like crazy. At any point in the prior 4 months, this better-than-expected report would have sparked a frenzy of buy orders.

But yesterday, the market fizzled. More importantly,it fizzled after an already steep decline since Monday's opening highs. This was a great spot for an oversold bounce, combined with a great reason to bounce, but it didn't materialize. That's an important clue that the intermediate-trend has changed. Buy-the-dip is now sell-the-news.



Pulling back the microscope, the weekly chart looks tired. The S&P 500 (SPX) has tried valiantly to get over 1000 and stay there over the past 7 weeks, but it's just not happening. Indeed, 5 of the past 7 weeks has seen price move above SPX 1000 at some point during the week, only to collapse back under this level by Friday's close.



I've pointed out often before that the bear market likes to retrace all the way back to the last break-down point -- which is the point where the selling accelerated down to new panic lows. A year ago last July the SPX was breaking down under 1000 before starting on that incredible 13 day slide down to the panic low at 775. (Does anybody but me even remember those 13 days anymore?)



The market has now come back to fully test this breakdown point, one year later. As I've shown before, each previous bear market spike down has also come back to test its breakdown point on the ensuing retracement. This current rally has been spectacular, but it's really just par-for-the-course for this bear market, on a relative scale. The distances are just getting greater the farther along the bear path we travel. Unfortunately for the bullish majority, this expansion of range should continue to work on the downside too.

The VIX is confirming the sentiment shift. The weekly VIX looks to be giving an important white candle. This is a very important sign -- although not infallible -- that sentiment has shifted back to rising fear. Conditions are now perfect for a selling epidemic to spread among the vast bullish majority.



Sometime over the next few days -- probably today -- we should see an attempt at a bounce. This has been a stunning reversal from Monday's opening euphoria, which saw the SPX sprint to 1014 in a rush. It's been a straight-line decline since then to yesterday's close at 982. Any tepid, sideways-type bounce from here should be setting up a prime shorting opportunity.

Sentiment Dashboard
by Adam Oliensis



SENTIMENT TANK: Filled up 4 points to 12% full of negative sentiment.

SHORT-TERM: Sustaining a decline phase even if a lumpy one.

MID-TERM: Progressed 4 points to 28% in its decline phase. Our Confidence Diffusion Index (CDI) popped to 3 (out of 7), telling us that indeed there is some little momentum of sentiment developing (of the decline-phase variety).

LONG-TERM: Clicked out of neutral and into a nascent decline phase at 5%. Our weekly CDI also moved up to 3.

BOTTOM LINE: The tank rose over the key 10% area. It wants to test the 22% area. A breakout over 22%-ish would normally confirm that we're in a decline phase and take the market down further. A failure by the tank to fill past 22% would likely accompany the SPX bouncing up off the 965 area. How fearful will the market become if/when 965 breaks to the downside? That's probably about as key a technical question as we can ask right now. The MOST BULLISH scanario would be to see SPX 965 hold as support while the tank filled OVER 22%. That would be a bullish divergence. If 965 breaks and we do NOT see the tank fill over 22%, then that would be an important bearish divergence.