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Consolidation or Distribution?

(March 17, 2002)

DJIA Price and NYSE Volume Information (November 1, 2001 to March 15, 2002)

The Dow rallied more than 90 points on Friday to close at 10,607, nearly reversing the entire 130-point decline on Wednesday and resulting in a 35-point rise last week.

Looking at the chart above, it is difficult to tell whether we are in the consolidation phase or the distribution phase. Are we ready for another leg up? Or are we due for some fresh downside? We note that all the recent upside has been on low volume, and selling pressure by the big money has remained high.

Moreover, the Commitment of Traders report revealed that the commercials are still at a record net short position (even though it has decreased slightly), and the VIX and VXN again sank to levels that have marked a significant low in the market in recent months. While the VIX and VXN have not been as reliable during the bull market, it has been during the last two years since this bear market began.

Richard Russell reports that recent selling pressure has all but disappeared. Does this signal capitulation by the bears? We do not know. We do know, however, that valuations remain high and virtually every technical indicator out there signals a significant top (including the volatile contrarian Rydex assets indicator where the bullish sentiment there is extremely high).

We believe a lower low (that is, a closing low below last week's low of 10,501.85) is needed in order for the confirmation of the beginning of a new downtrend.

In the meantime, buying power and volume could still increase and this could result in one more spike in the market. Bears better be careful.

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