Wednesday, October 20, 2010

Critical technical tests everywhere

Last week I wrote that the relative performance of the Financials was a key to understanding the health of the bull. Given all the news that have tossed the sector around, the relative performance chart of the Financials are at a critical technical testing point:

The chart below shows that the sector had broken down from a key relative resistance level (red line), bounced off a Fibo support level and rallied to test the (red) relative resistance level. Should the sector weaken further on a relative basis, it would be bad news for the bulls.

When I looked at the relative performance of the Materials sector, which is a measure of the reflation trade, the Materials sector approached a relative resistance level and backed off. It's now testing a relative uptrend line. Similar to the Financials relative performance chart, should Materials fail at the relative uptrend, it would be another indication that this bull move is over, at least for the duration.

Instead of analyzing the Materials sector and if we zoomed in on the golds, the relative chart tell a similar story. The group remains in a relative uptrend but it has retreated and is now testing the uptrend line.

The behavior of some of these critical sectors and groups in the next couple of days will be important signs for the health of the bull.

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