July 30, 2008

Another solid effort by the bulls today as they managed an impressive follow through from yesterday’s 2% bounce. But here’s the breakdown: the status quo that we have mentioned in previous articles (namely financial crisis, housing meltdown, and oil exuberance) hasn’t changed. There is no confirmation that another major bank won’t go belly-up though it seems like the banking industry is starting to come clean with some of their bad loans. Oil has pulled back significantly, but we are still seeing $100+ oil and it saw a spike in prices today also (largely ignored by the broader markets). And as for housing, well, there is no relief in sight despite Congress and the White House’s attempt to help out those in or nearing foreclosure.

Nonetheless, recent action in the markets can not go ignored. There are some solid technical improvements, even if the fundamental picture doesn’t validate it, with what can be considered a breakout to the upside. However, we would warn readers to show caution on this early upside-breakout, namely because, the bulls need to break the previous high that it is eye-to-eye with as defined in both the NASDAQ and S&P charts below. Failure to break these highs leading to further selling would demoralize the bulls and a break of support at the previous lows established from this month would create a mini-double top that the bulls would prefer avoiding. While in our own portfolio we are skewed to the downside, we are not afraid to begin aggressively adding new positions to our portfolio if we can get that breakout to the upside. We have some setups that we want to throw out there, but until we have the confirmation technically we won’t do it.

Here’s the NASDAQ and S&P Charts…