May 25, 1999 – Special Report
Today, the Dow Jones Industrial Average was down 123.58 points to 10,531.09
(-1.16%), the Nasdaq Composite was down 72.76 points to 2380.90 (-2.97%),
the S&P 500 was down 22.25 at 1284.40 (-1.70%) and the Russell 2000 index of
small cap stocks was down 5.94 to 434.45 (-1.35%). Incidentally, the DJ
Internet commerce Index was down 16.80 to 243.93 (-6.44%) after being down
just over 7% yesterday.
It has been an ugly couple of days for those in the Internet stocks. Most,
if not all, of the issues mentioned over the weekend in the StockMotions
weekly newsletter have been hammered down by over 10% in just the past few
days. With them, many of the tech high flyers have also come back to earth.
Is a trading opportunity just around the corner?
Let's explore.
The NYSE Arms Index closed above 1.50 both yesterday and today (Monday @
1.75, today @ 1.58). Yesterday, it maintained an upward movement throughout
the day. In other words, sellers got more and more worried as the day
progressed. Today, there was a bit more confusion. The Dow and the Nasdaq
was down, then up, then down, then up again and then in the final 90 minutes
or so, they went down hard. The daily chart of the Arms index reveals the
“worried” selling that occurred at the end of the day. Usually, when the
Arms index goes over 1.50, it signals a short-term bottom forming. (Note
that I say usually. It has been known to close above 1.50 and even greater
selling follows – example October of 1987).
Another indicator that I like to use on a short-term basis is Bollinger
bands. Tonight the Dow and the Nasdaq are sitting at or below their lower
Bollinger band. Usually, these indexes don't stay at or below their lower
Bollinger band for long (one to three days). Of course, when an index stays
below its lower Bollinger band for three days, let's say, it does so while
the index and the lower band is declining.
What caused today's late day capitulation?
Certainly, there was some nervousness. Another answer, especially in the
Internet sector, was margin calls. I have some friends in the brokerage
business, and rest assured there were unmet margin calls going into the
final hour of trading today. In addition, given the drop in the last hour,
I am sure that more margin calls were made after the close of trading.
Those will need to be resolved tomorrow morning.
Now before talking about tomorrow, let's review where the moving averages
sit tonight.
Yesterday and today, the Nasdaq closed below its 50 day moving average.
Tonight that MA stands at 2507.11. Its 200 day MA is 2115.00. The Dow's 50
day MA is 10,459.34. Its 200 day MA is at 9215.03.
For the Nasdaq to stop its drop, it needs to get back above its 50 day
moving average, which is already over 126 points away, or 5.3% from today's
close. The Dow, on the other hand, is now less than 100 points from its
50-day MA.
If this is to turn around tomorrow (even if its just for a one or two day
bounce), I wouldn't be surprised to see weakness in the first hour or so (to
wash out the overnight margin calls) followed by a strong rally throughout
the rest of the day. This scenario is just a possibility based on the
moving averages, the Bollinger bands, the Arms Index and the margin calls.
On a longer term, the internals of the market have continued to weaken.
The NYSE cumulative advance/decline line doesn't look very good. The new
lows were higher than 40 and greater than the new highs….
Another indicator, the CBOE Volatility Index (VIX.X) bears watching. Today
it closed at 29.58. If it closes above 30.00 and stays there or creeps ever
higher, it would signal worse things to come.
On the positive side, U.S. bonds held up. If they hadn't, today would have
been much, much worse.
Where to from here?
There is a possibility that we may some sort of bounce tomorrow. I think
that by 10:30 am, we will have an answer. If the bounce doesn't happen, the
market will have another miserable day. It is doubtful that it just stands
still tomorrow, given all the signals given by many of the technical
indicators tonight.
For those who are interested, the NYSE circuit breakers no longer kick in at
a 250-point decline in the Dow. The first circuit breaker kicks only after
a 900 point decline in the Dow, the second at 1800 points and the third,
which would close the market for the day, occurs after a 2700 point slide in
the Dow. These numbers are adjusted quarterly.
If you'd like to read more about the NYSE circuit breakers, there is a link
that explains all about them on the StockMotions website. It is under the
“Internet Financial Resources” section of the homepage of
stockmotions.com .
That's it for now. Tomorrow should be educational.
Paulo
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Disclaimer: All contents and recommendations are based on data and sources
believed to be reliable, but accuracy and completeness can not be
guaranteed. Please be aware of the risks involved in stock investments. I
may or may not have purchased or sold the securities mentioned in this
newsletter without any further notice. Please do your own analysis before
investing in any stock. None of the companies listed ever pay for any of
the recommendations or mentions. |
