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Hello Fellow ChartWatchers!

Let's start the month of August off right with a good, old-fashioned education article about the modern version of a good, old-fashioned chart overlay, Keltner Channels! Here we go...

Keltner Channels are a set of three lines that are overlaid on top of the price bars of a chart. As with other channel overlays, the outer two lines define a region that generally "contains" the price action and helps you determine if the prices are "too high" or "too low" relative to a specified moving average. Here is an example:

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In a recent Market Message, I discussed how the stock market is a leading indicator of the economy and why it isn't a good idea to use economic forecasting to trade the stock market. Historically, the market turns down at least six months before the economy. Chart 1 shows the NYSE Advance-Decline Line peaking last June. That suggested a possible recession by December of last year. Chart 2 shows the S&P 500 peaking last October. That puts the odds for a recession somewhere around April of this year. This week's economic reports showed that second quarter growth was below economic forecasts. It probably would have been even worse without a temporary boost from rebate checks. More importantly, GDP growth for the fourth quarter of last year was actually negative.

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This past July-2008 was a very important month for the capital markets; crude oil peaked and traded lower by -11%. This is rather substantial to be sure, and one would be reasonable to believe that the demand/supply equation coupled with a daily technical oversold condition would push crude prices back higher. Perhaps it shall in the short-term, but we fear any and all rallies are going to be sold and sold rather aggressively to push prices towards $100/barrel by the November election. The reason as to the "why and how" it does so is left to the benefit of time.

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The rally that began nearly three weeks ago, out of the jaws of a potential crash, has become rather unimpressive in the last two weeks. As I said in my last article, the rally seemed to be contrived from the beginning, and support for the rally has faded rather than grown, as we normally see in bull market rallies. At this point (about an hour before the close on Friday), the technical chops seem to be lacking for the rally for the market to power upward to the primary declining tops line (in the area of 1375).

One of the things that is lacking is volume. As you can see on the chart below, initial volume was pretty good, but recent volume is substandard.

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The Russell 2000 ETF (IWM) and Nasdaq 100 ETF (QQQQ) were stifled at resistance this week and the bulls are getting a test. After surging above 69, IWM met resistance at broken support and the 62% retracement mark. QQQQ met resistance at 46 in early July and this level held throughout the month. QQQQ shows relative weakness because the July breakout attempts failed. Both ETFs need to break resistance if the broad market rally is to continue.

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Spotting tops and bottoms is perhaps the best reason for utilizing technical and sentiment indicators in your investing and trading arsenal. The first signs of a bottom forming can be subtle and I'm beginning to see a few. Consumer discretionary stocks, which have been relative laggards during the market weakness, are showing slight signs of relative strength and on a longer-term weekly chart have printed a long-term positive divergence. Take a look at Chart 1:

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