And today makes six!

Market Commentary:

And today makes six!

The probabilities of six consecutive weeks of advance were low, yet it happened anyway. You could have gotten some pretty good odds against a 6-week rally even just a week or two ago, if you were a betting man. I’ll bet a lot of you feel like “betting” is what it has come to these days – roll the dice and put your money down.

To be honest, I expected this rally to end at four or five weeks, at the most, but I was proven wrong as today’s minor advance kept the consecutive weeks of advances in tact – and now at six.

During this week many banks released earnings and some banks gave guidance. While their earnings are dropping, the media continues to emphasize that the earnings are better than expected. They should be for crying out loud!

With the change in the mark to market rule, banks can pretty much re-write their balance sheets. Given that most of them have seen a significant increase in capital with the distribution of the TARP funds and the fact that their toxic losses can now be stated at dart-board value, the banks should be showing profits, not losses that are suddenly better than expected.

Bottom line – the banks are still losing money and it hasn’t gotten better. The information you hear is better, but the facts are still the same.

However, the current stock market is anxious to see any good news be confirmed, in any possible way. And since the banks are now doing better than they were expected before the change in the method of reporting toxic assets, then that is all the market needs to hold on to the precious gains created over the last month.

But will it last?

I know you must be tired of me harping that a bearish pattern is still in play and I know that many of you want to get back in the market, feeling that the train might have left the station and that the biggest gains following the bear market may now be over.

Not so!

Take a look at the intermediate chart (weekly prices) for the S&P 500 below. It contains several points of view you need to understand.

This chart clearly shows what I mean by a “Left Translation”. You can see the lower lows and the lower highs right up to this closing week. While this final 6th week is getting close to setting a higher high, it has not done it yet.

There are some other things to take from this chart.

Look at the Weekly Stochastic Indicator, illustrated below the pricing chart. If you carefully inspect the chart you will see vertical red and green lines. The red lines represent intermediate highs and the green lines represent intermediate lows.

In the last year the market has seen the following advances and declines:

An 8-week decline during May-July of 2008, a 5-week advance during July–August of 2008, 14-week decline during August-November of 2008, a 6-week advance during November-December of 2008, a 9-week decline during January-March of 2009, and the most recent 6-week advance during March-April of 2009 (with nary a single down week).

Also note that the intermediate tops almost perfectly line up with the peak values of the weekly stochastic black line. This indicator is at the highest value reached in the last year and by all rights should start heading down, suggesting that another multi-week decline will follow.

While technical indicators like this weekly stochastic are not fortune tellers or even perfect market trend indicators, they are right far more often than they are wrong.

Pay attention to the smooth blue line on the chart, too. It is a 10-week moving average line, often used to represent a value similar to the 50-day moving average, i.e., a popular mean value that prices regularly oscillate around. One way or another prices and this blue line are going to come together again, probably over the next several weeks. Prices are likely to decline and the blue line is likely to rise a bit.

The bottom line is that a more confident buying entry point is ahead of us. This is not the time to enter, even if a bullish trend is developing.

We will have the initial confirmation of a bullish trend when either a higher low or a higher high develops. When that can be determined, then the best entry point is at the higher low. Hope this makes sense to you.

There is one more thing I want to draw your attention to, and that is another technical indicator called the Bollinger Band. The Bollinger Bands are represented by the light grey lines. The upper grey line is referred to as the upper Bollinger Band and the lower grey line is referred to as the lower Bollinger Band. The dashed grey line in the middle is referred to as the middle Bollinger Band.