November 18, 2008, 2:05 pm
Double-Bottom Blues
Posted by David Gaffen
Rob Curran reports:
The good news is that stocks fulfilled a bullish pattern on the charts last week. The bad news is that such patterns have not amounted to more than a hill of beans in this crazy market.
Last week, the Standard & Poor’s 500 and Dow Jones Industrial Average bounced at levels close to their lows from late October. In technical analysis, that is called a “double bottom” and it is supposed to be a very bullish sign. The thinking is that the return of buyers at a similar level establishes that level as the minimum value for an index or security. Once that base is established, stocks are supposed to rise.
But in 2008, which is the most volatile for stocks by some measures since 1933, a series of double bottoms have turned out to be false hopes.
The double-bottom theory was much in vogue for a couple of months. Then, in mid-July, the S&P 500 dipped to 1200. The index nearly revisited that low just after the government took over Fannie Mae and Freddie Mac in September. That double bottom didn’t work out so well, either, after Lehman Brothers failed and precipitated a market crash.
The S&P 500, the professionals’ gauge of the U.S. stock market, closed on Oct. 27 at 848.92, its lowest close in more than five-and-a-half years. On Thursday, Nov. 13, the S&P 500 appeared to break through that support, setting a new five-year intraday low of 818, before rebounding to close above 900. Another double bottom. Only problem is, it’s now trading at 840, sinking, once again, into dangerous territory.
The Dow followed a similar pattern, closing at 8175 on Oct. 27, then “testing” its intraday lows on Nov. 13 before a sharp rebound. The Dow was trading at 8250 recently, within 100 points of that closing low.
“Thursday’s sharp intraday reversal saved the S&P 500 from closing below minor support at its Oct. 10 (intraday) low,” said Katie Stockton, chief market technician at MKM Partners. Recent action has been “marked by a tug-of-war between buyers and sellers. We expect the buyers to win the tug-of-war eventually, yielding a recovery rally before year-end.”
Ms. Stockton said the market also has a “positive bias” because technical indicators based on moving averages and momentum measures behaved better than the price action last week. “Behind the scenes, things are improving very subtly,” she said.
With current risks including failures of U.S. auto makers and emerging-market debt crises, no minimum value for the S&P 500 or the Dow is set in stone.
“At this point, the lows in the market have been tested on a number of occasions, though each time the rebound has been progressively tepid,” writes Charles Payne, president of Wall Street Strategies. “While this does not fall into the parameters of normalcy from a historical perspective, the bigger context is that there really is nothing normal about this market.” |
