Market sentiment suggests further downside likely
By Michael Ashbaugh
Jan 20, 2009 14:37:00 (ET)
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CINCINNATI (MarketWatch) - With last week's downturn, the bear market came back.
That's partly because the S&P 500 violated the 850 level, confirming the primary downtrend.
And against this backdrop, market sentiment remains complacent, suggesting further losses are likely.
The charts below add color:
The S&P's hourly chart details the past three weeks.
Since violating the 850 mark, the index has closely observed that area as resistance.
In fact, the S&P closed last week precisely at 850 before starting this week lower.
From current levels, first support holds at last week's low of 817.
Meanwhile, the Dow's near-term view is similar.
Namely, the index has violated support around 8,350 and has since observed that area as resistance.
In Friday's action, the blue-chip benchmark topped intraday at 8,341 before pulling in modestly.
On further weakness, modest support holds around 8,100 and is followed by a more significant floor around the 8,000 mark.
And the Nasdaq's near-term view is also bearish.
With last week's losses, it violated support at 1,530 and then observed that area as resistance.
In fact, the Nasdaq closed last week at 1,529.
From current levels, first support holds around 1,493 and is followed by another floor at last week's low of 1,556.
Widening the view to six months adds color.
On this wider view, the Nasdaq is getting a solid test of the October low.
At the same time, it holds just under its 50-day moving average, which currently rests at 1,530.
All told, the Nasdaq looks vulnerable here unless it can sustain a break back atop the 50-day.
As for the Dow, its six-month view is treacherous.
A market bull would point out that a retest of its range top is now possible, meaning a rally to the 9,000 area.
Conversely, its seven-week trading range has become well-defined, and ranges normally break in the direction of the primary trend - in this case, that's lower.
Either way, the potential upside downside is about 750 to 800 points, making the risk/reward unfavorable from current levels.
And the S&P 500 is where the real technical price action is taking shape.
Again, the index closed last week at 850, matching important support around the October lows.
On a decisive break lower, a retest of the November trough, around 740, is definitely possible, if not likely.
After turning lower last week, the U.S. markets have closely observed their breakdown points as resistance.
Consider the following:
Each area is illustrated on the hourly charts above.
And upon reaching these levels, the U.S. markets have sold off - bearish price action.
Against this backdrop, market sentiment remains complacent, suggesting further downside is likely.
The Volatility Index makes the point:
The charts above illustrate the relationship between the S&P 500 and the Volatility Index.
As a rule, extreme highs on the VIX are considered bullish, while extreme lows are taken as a bearish signal.
Note that last week, the S&P notched its fifth-lowest close since the market crash.
Yet as the chart illustrates, the Volatility Index holds the extreme highs reached during the October and November lows.
This is a bearish signal, suggesting that the VIX needs to reach higher levels - and the S&P needs to drop further - before a sustainable upturn is in place.
Setting aside sentiment, the following bearish elements are in place:
Taken together, this is a distinctly bearish backdrop.
Nonetheless, it's worth pegging markers that would strengthen the bull case.
Starting with first resistance, it falls out as follows:
And just above these areas, each benchmark's 50-day moving average falls out as follows:
On a break atop these areas, we can reconsider the bull case.
Yet with last week's break below S&P 850 - driven by 29-to-1 negative market breadth - a comparable rally is needed to neutralize the bearish near-term tone.
All told, the bear market returned last week, and serious technical repairs are now needed to reassert a near-term uptrend.
The charts below highlight names well positioned technically. These are intended as radar screen names - sectors or stocks positioned to move near term. For the original comments on the stocks below, check out The Technical Indicator Library .
The charts below illustrate the fertilizer/agriculture resurgence. Each has a slightly different backdrop:
Starting with Syngenta AG (SYT, Trade ), it notched three-month highs to start the year before staging an orderly pullback.
It now holds at a better entry near support, and 10% under the January peak.
Meanwhile, Terra Nitrogen staged a breakout last week, an unusual move in today's market.
The rally came on strong volume - improving the chances of a sustainable upturn - and its near-term outlook should remain higher barring a close under first support, around $110.
And Monsanto (MON, Trade ) has another good-looking chart.
Earlier this month, it spiked atop a three-month downtrend after posting strong first-quarter results.
Since then, it's pulled in on lighter volume to a better entry near the 50-day moving average.
Initially profiled Jan. 7, Novellus Systems (NVLS, Trade ) remains well positioned.
Earlier this month, the shares spiked atop the 50-day moving average for the first time since September, when it was priced around $21.
Since then, it's sustained the upturn, rising to challenge 10-week highs on strong volume.
Its outlook would further strengthen on a break atop the January peak, around $14.20.
Epiq Systems (EPIQ, Trade ) is a small-cap provider of information-technology services to the legal profession.
Since bottoming in October, the shares have trended higher, briefly notching 11-month highs.
By comparison, the ensuing pullback has been orderly, with the shares closely observing the 50-day as support.
Last week's lift from support positions Epiq to retest the December peak.
Initially profiled Jan. 14, Biogen Idec (BIIB, Trade ) remains well positioned.
Very simply, it broke to three-month highs on Friday, clearing a well-defined range top.
Its outlook should remain higher barring a close back under the breakout point, around $49.50.
SanDisk Corp. (SNDK, Trade ) is a mid-cap maker of flash-memory products.
As the chart illustrates, it started 2009 with a sharp spike from a head-and-shoulders bottom.
By comparison, the subsequent pullback has come on lighter volume, placing the shares at a better entry near support, and 9.7% under the January peak.
Initially profiled Dec. 15, Linear Technology Corp. (LLTC, Trade ) remains well positioned.
Since breaking atop its 50-day moving average, it's closely observed that level as support, signaling a new uptrend.
And last week, it lifted to challenge three-month highs.
Recent strength has come on strong volume, improving the chances of an eventual breakout.
Praxair (PX, Trade ) is a large-cap manufacturer of industrial gases.
It started the year by breaking atop its 50-day moving average, an area that's capped the shares going back to July.
Since then, it's staged an orderly pullback, placing the shares at a better entry near the 50-day, and 7.5% under the January peak. |
