Louis, and MA fans - Spent some time here this weekend entertaining the "big rally" theory kicking around at the moment. I ended up with another piece of evidence that the Nasdaq party is indeed over with, done, finis, toast, gonzo, pooched, whatever you want to call it.
I call this chart "MA Magic" - the 60 week, 120 week and 180 week MAs overlaid on COMP, from 1982 to present, and you should also read the notations below that I've made about it -
bigcharts.marketwatch.com
The weekly MA60/120/180 triad ruled the Naz of the 1990s. MA60 was occasionally breached along the way up, but always found support at the MA120 with only one exception, the Russian default scare in 1998, where it kissed off the MA180. You could take these lines to the bank for a decade.
As we entered Y2K, you can now see the first break through MA60 wasn't as severe as many people probably now remember it, which also helps explain why it was so eagerly bought, promulgating the double top.
The second break was in earnest, but since there was still a bounce at the previously reliable MA120, no panic yet. The decline continued however into late autumn of Y2K, where the COMP gets temporarily rescued by good old MA180.
Unable to break the downward momentum in time, MA180 itself falls before retracing, but the signpost is there - once breached, the support no longer exists. After a short relief rally, the decline resumes, making lower lows early in 2001, and again later after the 9-11 event.
The index may have already crashed but the MA magic continues. The same MAs that provided all that support on the long trek up now represent solid titanium ceilings that will hold back any rallies. Calendar 2002 has already seen MA60 twice keep a lid on rally attempts.
Here's some more interesting observations - look at the Volume+ shifts at the bottom.
The pre-Y2K pump is very obvious as an almost solid yellow band of up volume of epic proportions, and you can see the double top put in, on comparatively tepid volume. The rest of the year is characterized by massive bailing.
After a post-election January rally early in 2001, the sellers return and wash out the index. Contrary to what most people perceive, the buying/selling for the middle of the year is actually in balance, and the 9-11 event actually brings out the buyers.
Now look at the red MA50 line of the volume, and consider classic bear market action. As the COMP rises back up to the weekly MA60 line in January 2002, it hits a brick wall at that line. The ensuing rally is on below average volume and doomed to failure, and upon reaching MA60 a second time, COMP is again met by a another wave of above average selling volume.
The present situation is rather ominous IMO because we are now headed down, away from the MA60 on increasing volume, and only a permabull would even attempt to put a good face on that. COMP hasn't even begun to attack the stronger MA120 and MA180, which have coincidentally just completed a bearish crossover.
If you measure the amount of deviation that MA60 has historically tracked away from COMP, a drop here to the COMP 1000 support that held during 1995-1996 is well within range, and could even be broken. Sub-1000 would also be consistent with the lower trend line of the existing dominant channel coming down from COMP 5000.
It's not like the TA picture is out of synch with the FA picture here, either, because the FA stinks and it gets worse every week. Why anyone would buy the COMP now can only be explained as people remaining in complete denial that it ever fell in the first place.
The only positive thing I can say about this chart is that the MA60 and MA180 remain about as far apart today as they were at the top. That delta will contract from here over time, holding out hope that the process might involve to MA60 coming up a bit (i.e. a rally of substance) and not just the MA180 coming down to meet MA60 (and taking 10 years to do it).
Even so, the COMP is going nowhere until it gets over that MA60 line, which now caps a rally, if any, at below 1900 (and still falling). Therefore, in a market currently perceived as an oversold good risk for longs, we instead really have upside potential limited from here at 1600 to <1900, but downside risk to 1000 or lower - that's 2:1 against the bulls.
I know that markets have a way of doing what common sense says they shouldn't - COMP will have to do exactly that if it wants to go up. |
