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Technicals Vs. News

Several days ago, the markets were setting up for a break out to the upside. The symetrical triangle pattern was playing out in classical fashion, but unfortunately, Treasury Secretary Geithner disappointed the market with the announcement of his bank rescue plan. The market had its hopes set too high by the President who said that Tim's plan was going to solve everything, and when he announced it there was not really a plan but rather an outline of some concepts that Treasury was developing.

Above I have shown one of the widely followed timing indicators, the McClellan Oscilator, that the investment community follows. It provides "over bought" and "over sold" readings based upon advance/decline statistics for stocks traded on the NY Stock Exchange. When the reading gets to -100 or + 100 (you can see that we are passed through -100 now) you get a signal for a change in the direction of the market.

The change comes about because psychology changes and people that were overly agressive in selling start to feel that they don't want to miss a rally – or the people that were short sellers decide to buy to cover their short positions. Whatever the reason, a rally comes about. However, this sort of sentiment is being trumped by the news coming out of Washington. The investment markets want to hear a decisive plan from a leader, and so far it has not seen that.

There are some good things coming about from the Geithner bank plan as it develops that may ultimately heal the financial system, but he is not exuding confidence that market can latch onto. Until that happens, I would not anticipate that the rally will be significant. We will rally at some point up to the 200-day moving average (as discussed in the previous posts about the triangle pattern), but not until the sentiment changes.

Mark