TECHNICALLY SPEAKING: Stocks At A Critical Crossroads
21 Jan 13:00
By Karen Talley
Of DOW JONES NEWSWIRES
NEW YORK (Dow Jones)--Stocks have wedged themselves between a rock and a
hard place.
Major market averages have come very close but failed to decisively move
through their 200-day moving averages. This has happened three other times
during the current bull market and each time indexes went on to make lower
lows. In other words the current action suggests extreme caution is warranted,
market technicians say.
At the same time, stock indexes are just above their 90-day moving averages,
which, once they fall to these levels, can produce a bounce and cause a rally,
although these moves up have been brief in the past. Or, the indexes can drop
below their 90-day moving averages, which, according to technical analysts, is
a major breakdown and can cause more selling.
Given the positioning, "It's decision time for investors," said Rod Smyth,
chief investment strategist at Wachovia Securities.
"Investors who feel the economy will continue its sluggish recovery and have
the luxury of a long-term horizon should remain slightly overweight in stocks,"
Smyth said. "But those who have too much money in stocks relative to their risk
tolerance or have limited time horizons should rebalance their portfolios," or
do some selling.
If investors take anything away from the current action, it's that the first
phase of the recovery - off the October lows up to the 200-day moving averages
- is complete, Smyth said.
Or, as Jeff deGraaf, chief technical analyst at Lehman Brothers Inc., put it,
"The rally off of the October low has to be treated as another countertrend
move to the well-established bear market."
It was quite a run. From early October to the beginning of last week, the Dow
Jones Industrial Average rose 19%, the Nasdaq Composite Index gained 24% and
the Standard & Poor's 500 added 17%.
Investors were hoping the gains could continue, not that recent action would
threaten to put major averages in negative territory for the first time this
year.
Certainly, the Dow average kicked off 2003 in style, marking its best its
best three-day run ever by jumping 171.88 points. The Nasdaq went on to push
through its 200-day moving average, which is considered a significant feat
because the level is a key resistence point, or a place stocks have hit and
fallen back from in the past.
The Nasdaq first broke though its 200-day moving average on Jan 10, when its
closed at 1447.72, or 14 points above its 200-day moving day. The index stayed
above that technical point until Jan. 15, when it closed at 1438.80, about 10
points above its then 200-day moving average of 1428.19.
The Dow, over that period, came within 70 points of its 200-day moving
average on Jan. 14, when it closed at 8842.62.
The S&P came closest on Jan. 14 as well when its closed at 931.66, just 17
points away from its 200-day moving average of 948.
And then came last week, with the Dow losing 198 points, the Nasdaq falling
71.52 and the S&P 500 declining 25.79, taking the averages from contenders to
moving decisively below their 200-day moving averages and now struggling to
stay above their 90-day moving averages, which signals a considerable momentum
breakdown.
The Dow, at 8520, is about 140 points above its 90-day moving average; the
Nasdaq, at 1374.55, is 38 points away; and the S&P, at 896.47, is 11 points
away.
The positioning "has shifted our momentum outlook to neutral from modestly
positive just a week ago," said deGraaf of Lehman Brothers.
-By Karen Talley, Dow Jones Newswires; 201-938-5106;
karen.talley@dowjones.com
(END) Dow Jones Newswires
01-21-03 1300ET |
