Week three was full of emotion. The major indices broke down below their moving averages with the financial sector performing the worst. The market will often times move in the path of least resistance so these trend lines should now act as resistance points if a rally should occur. Monday’s bearish A/D Line and Breadth Ratio along with a 3 point rise in the Volatility Index (VIX) was the first sign that fear was resuming into the markets. Thursday’s bottom was marked intraday by a hammer on the 15-min chart followed by a steep rally with increasing volume.

Many of the top performing names we’ve been watching broke down on stronger volume this week which makes us believe that a rotation in the leading industry groups is taking place. One thing to note is that the large inverted hammer produced by the VIX on the weekly chart. This could mean confidence among investors is growing, however it is more likely that investors are laying low until president elect Obama’s inauguration is over.

The three day weekend can provide an upside bias because it gives investors time to regroup and refresh their minds. Nonetheless, the formation of a bottom is a complex process and it is usually unclear when one is reached. Using the A/D Line and Breadth Ratio’s we are able to gauge what is happening with the markets “internally,” helping us filter out false moves and better define our entries and exits.