"Fading" the news is usually tempting but lacks chart punch this time

    Not to get all Dr. Phil on you, but let’s talk psychology for a moment. Chart study allows us to combine all outside market elements – fundamentals such as supply and demand – and the fear and greed aspect of psychology so that we can make reasoned, mathematically sound decisions on future market action. Friday’s action in small-cap stocks brings up the psychology surrounding market decisions because investors made a concerted decision to cast aside a horrendous picture of the nation’s employment position. (If you don’t usually bother with economic news, here’s the skinny: the unemployment rate shot to 6.5%, the highest level in 14 years.)

    Now, normally when the market “fades” or takes the opposite direction suggested by a bearish news event I will consider that an important show of strength. The “smart money” is taking a stand that the news isn’t really newsworthy. This is an old classic strategy among hedge fund managers – if the market fades the news, take heed! But while I typically will fall in line with the fade psychology, I also like to see the chart formation validate the thinking. As for Friday’s nice 2% rally in small caps, the chartist in me comes away asking “Where’s the beef?”

   First off, Friday’s advance was basically confined to an inside session. Now, while inside session activity can suggest waning momentum and a potential shift in trend, it can also mean that the market simply didn’t have the impetus needed to really test seller resolve on the upside, or buyer desire on the downside. Volume was nothing special Friday, so the rally was accomplished without confirmation from action, which favors the wary side of the equation. The market was unable to climb back above the 20-day moving average trend indicator as well. Also, the market was oversold after the largest two-day rout since the 1987 crash and headed toward the weekend, . . .

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