Friday 25-Oct-02 12:20PM New York / 5:20PM London
***Market Overview***
The long-term trends for the major indices (NDX, INDU and SPX) remain bearish, the medium-term neutral and the short-term bullish. The picture doesn’t get much more mixed than this. With the long-term trends still in bearish hands, medium-term and short-term rallies should be considered a bit suspect. Long-term reversals start with short-term and medium-term reversals, but we have yet to clear key medium-term resistance levels. Until such a levels are cleared in convincing fashion, we cannot consider the current advance as the first leg of a multi-month move higher. Bargain hunting and short covering can support a two-week advance, but new buying is required for a sustainable extension and medium-term trend change. The Feb/Mar and August rallies failed in the third week and stocks are showing signs of fatigue in the third week of this advance. The big October move began with expanding volume (10th, 11th and 15th), but volume soon subsided as key medium-term resistance levels came into play. The current consolidation over the last 4-5 days could be resolved with a bullish breakout and expanding volume holds the key. A breakout on expanding volume (2 billion shares for both the Nasdaq and NYSE) would provide convincing evidence of a resumption and change the medium-term trend bullish. Barring a continuation breakout, stocks appear overextended and vulnerable to a pullback.
***NDX Long-term***
On the weekly candle chart, the falling flag is back and the current advance looks similar to the August rally – less the low volume of course. While October volume was above the late summer average, it has been well below that seen from Sep-01 to Jul-02. It is going to take an advance with volume above 2 billion shares to impress this analyst. Regardless of volume, the long-term trend is definitely down by means of the Sep-00 trendline and support-turned-resistance at 1100. A falling flag is taking shape over the last few months and a break above 1000 would be positive. This is a potentially bullish consolidation, but cannot be considered bullish unless there is a breakout above the upper trendline. After two big advancing weeks, NDX could form a long upper shadow this week, provided the close is around 965. The third week marked the failure of reaction rallies in Feb/Mar and August. On the daily candle chart, NDX broke above the mid March trendline and exceeded its 62% retracement mark, but shows signs of fatigue near key medium-term resistance. Just below 1000, the index remains within a large trading range (1060 to 800) extending back to late July. Before we can be sure of a significant trend change, the index needs to clear this trading range, which would require a move above 1050. Until such a move, long positions are the prerogative of swing and position traders, not investors.
Long-term trend: Bearish – The decline has certainly slowed since late June, but the long-term downtrend has yet to be proven otherwise. 13-week RSI formed a positive divergence and moved above its prior reaction high, but remains below 50. This confirms less downside momentum, but momentum is still bearish, just a little less bearish than before. The price chart is the ultimate arbiter and it would take a move above 1060 to start thinking bull from an investor standpoint. Potential Support: 770 KEY Resistance: 1060
***SPX Long-term***
On the weekly candle chart, SPX formed a bullish engulfing pattern and followed through with a sharp advance the very next week. The third week is upon us and the index is showing signs of selling pressure. Should the index finish around 880 today, a candlestick with a long upper shadow would form and confirm resistance around 900. Long-term, the key resistance level to watch is 965, a break of which would forge a double bottom reversal. However, the index is still far from this resistance level and a bit overextended for the short-term. A move above 970 would project further strength to around 1140 (970 – 800 = 170, 970 + 170 = 1140). This level jibes with the Oct-Mar consolidation zone. According to Thomas Bulkowski (The Encyclopedia of Chart Patterns), the failure rate of a double bottom is 64%. BUT, and this is a big BUT, the failure rate drops to 3% if confirmed with a breakout. In other words, the odds of this being a double bottom are less than 50% as long as the index holds below 965. In addition, he states that 68% of confirmed double bottoms experience a throw back (pullback) before going on to meet their targets. This implies that the market may yet offer a second chance and a little patience may be rewarded.
On the daily candle chart, SPX has all the reason in the world to fail at 900. This level marks a 62% retracement of the prior decline and is confirmed by the early Sept consolidation and the mid March trendline. Since moving above 880, the index has consolidated over the last four days (a double top formed on the 60min charts). A move above 902 would signal a continuation of the prior advance, but I am not sure where that advance actually began (maybe from 830). In any case, a move above 902 would be bullish for the medium-term and suggest an assault on the prior reaction high at 964. As long as 902 holds, we should considered the index vulnerable to a pullback or possibly a resumption of the larger downtrend.
Long-term trend: Bearish – With the index near the upper end of its potential double bottom, the reward/risk ratio of a new long position is not good. The index jumped for three days and has consolidated the last eight. The overall pattern (12 days) looks like a rising flag, which is typically a bearish consolidation. A move below 875 would set a pullback in motion and the index could retraced 50% of its prior advance (768 to 902), which would carry back to around 835. If trying to anticipate the double bottom (965), I would wait for such a pullback and then scale into a position. For now, the long-term trend remains bearish and has yet to be proven otherwise. Potential Support: 776 KEY Resistance: 965 – watch 900 medium-term
***Dow Industrials***
On the weekly candle chart, the Dow reflects the same patterns as the S&P 500 above: a potential double bottom with key medium-term resistance around 9000 and selling pressure during the third week. Should the Dow close around 8300, a long upper shadow would form and this would further confirm medium-term resistance around 8500. The Dow would need to break above the prior reaction high (9077) to turn the long-term trend bullish and confirm the double bottom, which would then project a move to around 10500 (9000 – 7500 = 1500, 9000 + 1500 = 10500). Keep in mind that the long long-term drift is down by means of the Jan-00 trendline. On the daily candle chart, INDU moved above 8500 on Monday, but selling pressure kicked in the next four days. Two hanging man candlesticks and a long black candlestick formed (Tue-Thu). These four candlesticks could be forming a consolidation of their own and a move above 8550 would signal a continuation of the prior advance (8000 to 8550). A close below 8270 would confirm recent bearish candlesticks and argue for a pullback at best or a resumption of the larger downtrend at worst.
***XAU finding support***
XAU retraced 62% of its prior advance (42 to 89) with a sharp correction back to around 60. The decline actually extended to 55 and then formed a sharp ascending price channel. The break below the lower trendline signaled a resumption of the prior decline (89 to 55) and projects a move to around 43 (89 – 55 = 34, 77 – 34 = 43). Anything is possible, but before 43 becomes a potential target support at 59-60 is standing in the way. On the daily chart, XAU declined from 77 to 59 and then consolidated by forming a pennant over the last few weeks. These are typically continuation patterns, but can also result in a reversal. The key, of course, resides with the breakout. A move below 59 would signal a continuation low and project a significant decline. A move above 63.50 would signal a reversal. Together with a higher low (>55), this could result in a nice advance. Risk control is the beauty of a pennant – the prior reaction high (53.5) acts as a stop-loss on shorts and the prior reaction low (59) acts as a stop-loss on longs.
***Styles***
The growth end of the spectrum is still stronger than the value end, while large-caps are stronger than small-caps. As such, the strongest style remains large-growth, while the weakest remains small-value. The Small-cap Value Index (IJS) is still stymied at late September resistance around 72 and would need to break this level to turn bullish. A failure to breakout and subsequent support break at 69 would not be healthy. Of the value styles, only large-value shows any sign of relative strength, but this appears to be a short-term phenomenon. The Large-cap Value Index (IVE) is forming a rising flag with key short-term support at 41, a level also marked by the 15-Oct gap. On the growth end, the Large-cap Growth Index (IVW) and Mid-cap Growth Index (IJK) are both consolidating above their late September highs. The consolidations look like flat flags and upside breakouts would be regarded as bullish continuation moves. The Large-cap Growth Index (IVW) has been consolidating just above 45.5 for seven of the last eight days. Further strength above 47.3 would be bullish, while a move below 45.5 bearish. The Mid-cap Growth Index (IJK) has been consolidating between 90 and 93.3, a break up would signal bullish continuation, while a break down would argue for at least a pullback. In an interesting twist, IJK has experienced good upside volume four of the last eight days.
***Sectors***
Basic-industry, industrials and utilities continue to underperform the Wilshire 5000, while tech, telecom and transport have led the market over the last few weeks. The previous leaders, pharma and consumer non-cyclicals, appear vulnerable to pullbacks as they run into resistance. Finance and cyclicals are all over the board and do not offer a clear picture from which to trade. The Consumer Non-cyclical iShare (IYK) ran into resistance around 43.5 from the early Sept consolidation, 62% retracement and the early June trendline. The advance broke above 42 to turn the trend short-term bullish, but has retraced 62% of the prior decline (45.25 to 40) and formed a series of bearish candlestick reversals (harami and bearish engulfing). Further weakness below 42 would not be health as volume has expanded on the decline. The resurgence in fixed line telecoms has lifted the Telecom HOLDRs (TTH) to a double bottom breakout at 27. However, this breakout appears to be in question with some weakness today. While double bottom breakouts are bullish, the reward/risk ratio of a new long position at 27 is not good at all. The advance from 21 to 28 was virtually straight up. Unless long on the break above 23.7 , it would be best to wait for a pullback or another pattern to take shape. |
