Bulls can't capitalize on bullish "doji"
Friday's indecision shows there is still a lot of work to do
By Tomi Kilgore, CBS.MarketWatch.com
Last Update: 12:07 AM ET Dec 4, 2000 NewsWatch
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NEW YORK (CBS.MW) - A technical pattern appeared in the Nasdaq Composite index last Thursday that gave the bulls an opportunity to make some noise. By Friday's close, a whimper was all that could be heard.
Although short-term signs of life may appear, Terry Danish, chief technical strategist at Investec Ernst & Co., says there is still no evidence of a real rebound, and it could be 6 months or more before the market's technical make-up turns around.
A "doji's" double dose
Many would look at Thursday's 109-point drop in the Nasdaq Composite ($COMPQ: news, msgs) as a bad thing. Candlestick watchers saw it as a light at the end of a tunnel. Not because it closed well above its intraday low, but because it closed (2,597.93) about where it opened (2,599.04) within a wide intraday range (2,641.75-2,523.04).
Believers in the candlestick charting method, developed centuries ago by Japanese rice traders, call that chart pattern a "doji," which translates to "at the same time." When these light up at the extreme of a recent move it indicates that supply and demand have reached equilibrium. If one side can show some initiative the following day, it can leave a lasting impression on their foes.
Bulls took charge early Friday, propelling the Comp to an intraday high of 2,749.06. But by the end of the day, they became very tentative. The day ended with the close (2,645.29) nearly in line with the open (2,644.09): another "doji."
The wide range (the low was 2,604.27) makes the formation similar to Thursday's. However, this time it's a sign of indecision; that bull's couldn't, or wouldn't, take advantage of the vulnerable position that bears were in. It's just this lack of conviction that makes Danish think there is a lot more repair work needed than just a few short-term bullish signals. Remember, Rome wasn't built in a day.
Long road ahead
Danish told me there should be short-term resistance at approximately 3,000. He got to that number using the 21-day "moving average," which he says has been an accurate gauge of the market's tendencies. Moving averages attempt to smooth out a market's move by plotting the average closes of a specified time period.
Coincidently, that was also close to the high on Nov. 27 (2,998.75). Technicians feel that old highs will offer technical resistance, since bears may be more willing to defend a line that had held once before.
Also, 50-percent retracement of the move from the Nov. 6 intraday high (3,480.01) and to Thursday's low (2,523.04) is 3,001.53. Although half-way back points don't necessarily hold too much technical significance, it would give a psychological edge to bulls, since any half-full glass is better than a half-empty one.
Keep in mind, any technical point that is met up with from different paths takes on a little more significance.
Upper resistance comes in around 3,520-3,530. The "M" looking formation, which showed up from the days beginning in early June to the beginning of October, is having a 'murderous' effect on the Nasdaq. The low of that formation's trough (3,521.14) should be difficult to navigate. Old supports, when surpassed, become resistance on the way back up. Bulls battled on Oct. 20 (intraday high of 3,535.11), 23 (3,523.69) and 24 (3,526.71) to break back above that level, but gave up.
The 50-month MA's line in the sand
Given the shaking nature of the bulls' psyche, it may be a better idea to focus on where to find support. Danish went back to using moving averages to find one, but this time he used a much longer-term version: the 50-month. Since the Comp crossed over that line way back in February 1991, it has never looked back. It came close on Oct. 1998, when the Comp dipped to an intra-month low of 1,357.09. The 50-month average was at 1,272.65. A vicious rally ensued, sending the Comp up to close the month at 1,771.39.
For November, the average was calculated to be at 2,373.66. As of the first day of December trading, the 50-month sat at 2,402.14. Was the November low of 2,523.04 close enough, Danish wonders?
More monthly supports
After that, there should be support at roughly 2,200. Take yourself back a bit, to January 1999. The Comp opened that month (2,207.45) near its low (2,192.68), but surged to close up 14 percent (2,505.89), capping a 5-month winning streak. In February and March, the market bided time; hitting monthly lows (2,224.21 and 2,235.19, respectively) that were relatively close to that of January's.
Markets tend to pause when they revisit old congestion areas. The perseverance showed by the bulls at that level paid off once, and they may be willing to fight to defend it again. Conversely, losers that spent a lot of energy trying to force the market lower may not want to make the same mistake twice.
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Tomi Kilgore is a reporter for CBS.MarketWatch.com.
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