Subject 36624
*****Technical Analysis (Oct. 6)*****
The markets fell sharply Friday in moderately heavy volume, with the Nasdaq closing below 3400 and the Dow below 10,600, the first time that has occurred in months. A few comments about the trend of the Nasdaq this year and then a description of some possible scenarios, follow after this TA.
The Nasdaq has a seemingly incessant down trend channel, which probably needs to be resolved by more panic selling and a selling climax. The high relative strength stocks have not corrected significantly yet, which makes some doubt the lows have been made yet. The Nasdaq opened basically flat and rallied a little to 3505 and then fell apart to close near the lows at 3361. The weekly stochastic is at 23% going down, daily 5% going down, hourly 19% going up, so while a technical bounce could occur at any time, it would likely fail soon afterwards. Resistance appears to be at 3450 and strong resistance at 3620.
The TRIN closed at 1.67, and never got very much higher, signaling that a selling climax or final capitulation did not occur Friday. A/D was 5/14, up/down volume 3/14, on overall volume of 1.86B shares, so this day and last Monday could qualify as panic selling days. Nasdaq is well below all moving averages. RSI is at a low 30.5, while Williams%R, DMI, CCI, CMF, Acc/Dist and MACD are all very negative and in oversold levels. The OBV and rate of change are neutral to negative. The Summation Index is now –1700, and McCllelan Oscillator is –170, nearing extreme levels but could get worse.
A bright spot is that the put/call ratio rose to .74, and .80 or above is very bullish from a contrarian view. The long bond rate declined to 5.85%, still favorable to securities in the intermediate term. The NYSE TRIN was a negative 1.36. Dow weekly stochastic is 29% going down, daily 9% going down, hourly 22% going up, also indicating a technical bounce of a short term nature may occur early in the week, but probably will fail. The Dow may not hold above support at 10,500 and then the next level of support is 10,300.
FA (Fundamental Analysis) looks positive for the intermediate or long term, but the short term is negative to neutral, as the economy has slowed as have earnings growth. MA (Monetary Analysis) is neutral to positive, as rates are unlikely to be raised by the Feds, and the next move may indeed be down to ward off a recession and a stock market crash. PA (Psychological Analysis) and sentiment is neutral, as the investment advisors are still to plentiful though the put/call ratio has improved.
In 2000, the Nasdaq has had a tough time, as there was a double top made in January and March, at 5132 and 5064, which along with bearish divergences and extreme overvaluations, portended a major correction or bear market decline of 20% or more. In actuality, the index lost a whopping 40% from March to May, and certain internet stocks lost 50-90% of their value, as that sector had the worst decline since the introduction of the internet being represented in the securities markets. While the decline was expected from some technical analysts, the extent of it was surprising to most.
At the 3042 lows in May, a technical rally (as opposed to a bull market rally) from extremely oversold levels, to near 4000 was likely and occurred during the June-July time period, which some call a Summer rally. Then we had a trading range above 3700 until a gap at 3580 needed to be filled and was, and we overshot it to 3521, from which a key reversal occurred and we rallied to 4264, producing another double top from which we have declined to current levels. If we had broken out above the first top at 4289, we might have indeed had a trading range between 3920 and 4500, but the market never lies and we were then destined to retest the lows of the range near 3620 support and 3521.
We have been in a down trend channel for weeks now, and probably need a spike down in order to mark a significant bottom, otherwise, we can have an agonizing downward spiral. There probably needs to be “blood in the streets” or panic selling for a few days, punctuated by a selling climax for the bottom to be in place.
Some possible scenarios for the Nasdaq are:
1) A protracted bear market for technology stocks in the Nasdaq which lasts for 1-2 years and takes us down another 40% to the low 2000’s,
2) Trading range for several months between the high 2000’s and 3620 or so,
3) October low, to be followed by the next up trend towards 4289 for at least 4-5 months, and then a decline afterwards,
4) October low to be followed by the next strong bull market which takes us to at least a retest of 5132 by January or March, 2001.
For the first scenario to be played out, I believe we would have to have a catastrophe such as a Middle East war, asteroid or viral epidemic disaster, because the economic fundamentals not support it. The U.S. and global economies are growing steadily and there are more good times ahead, a few bumps along the way notwithstanding.
The second scenario is more likely than the first and is what occurred in the past with bottoms sometimes being made in October and retests in December. But those occurrences were after huge rallies and usually after double tops in April and in the late Summer or early Fall. This year we have not had a long-term top in the Summer or early Fall, but rather have had a technical rally within a bear market.
The last scenario may be more probable than the first two, although I would expect some backing and filling early on before a little stronger real momentum to the upside could occur. This scenario takes into account that the stock market is weak after an election year historically.
The last scenario is favored by the bulls. We could get a series of higher highs and higher lows of minor proportions for several weeks and then a strong up trend, perhaps a cup with handle or an inverted head and shoulders formation. Favorable seasonality would help make this scenario possible, as money flow can dictate the market direction in that it is correlated with supply and demand factors.
Technically the charts and indicators will provide early clues as to which scenario will actually come true. As readers have probably noticed, TA has to be re-evaluated frequently and flexibility by technicians is a definite virtue. The September/October timeframe has been weak historically and this time has been more brutal for technology stocks than for others.
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