***** Technical Analysis (for December 31)*****
It seems appropriate at this New Year to reflect on the past year and to make some calculated predictions for the coming year, with an emphasis on Januarys probable scenario.
In order for many of the likely scenarios to pan out, some technical indications should occur. I estimate that there is an 80% chance of the following technical readings and signals to occur, and the forecasts are based upon these signals occurring. If the readings and signals do not occur, then the forecasts are invalidated.
In the past year, the bear market in stocks continued into its third year, making it a secular bear market, not a cyclical one, thereby supporting the bearish contention of most technical analysts while proving the bullish fundamental analysts of Wall Street wrong once again. The Kondratieff cycle and Elliot Wave theory were supported by the market action, and both portend a continuation of the weak economic cycle and lower stock prices in the foreseeable future.
On the other hand, bonds and gold were in bull markets this past year, and both are likely to enjoy higher prices in at least the first half of 2003 if the following technical and fundamental issues are proven out. The U.S. dollar may be one of the biggest factors affecting stocks and gold in the year ahead as it now appears to be in the second leg of a secular bear market, having fallen below 104 support and having a double top in February, 2002.
The necessary ingredients (80% probability) for the forecast to play out are:
Fundamentally, a low level of capex by corporations again, less than robust consumer spending, continued issues about real GAAP and honest reporting of earnings vs. pro forma and creative accounting, pension funding problems, and weak, if not recessionary U.S. and global (especially Japan and Germany, the second and third largest economies in the world) economies in 2003.
Geopolitically, some of the X factors are the possible war against Iraq and the consequences of it, the final outcome of Bushs stimulus package proposal, North Korea, India-Pakistan, and South Americas political and economic problems, and of course, terrorism in the U.S. and the world.
Most important to me are the technical readings, signals and setups. I estimate an 80% or more probability of these technical signals occurring in January and if they come true, then the forecasts have a good chance of becoming true.
The McClellan Oscillator, Summation Index and 10% index for the Nasdaq and NYSE will mostly give negative readings in January, as will the daily MACD, Money Flow, Acc/Dist, and DMI (ADX). The weekly stochastics will cross down and stay mostly crossed down while the major indices will make a series of lower highs and lower lows, wherein the Dow will not close above 8650 nor Nasdaq above 1420, and they will break below 8250 and 1320, respectively, in the first half of January. The VIX MACD will stay crossed up and the VXN MACD will join it in crossing up. The Williams%R and CCI will spend most of the month at or near negative readings. All bounces and multi-day rallies will be on light to moderately light volume.
Most of these readings and signals were occurring in December, leading me to believe there was an excellent chance of the Santa Claus rally not occurring and for December to be down. If they occur or continue to occur, then I believe we will have another down year for stocks on balance, with the first 6-9 months being especially weak, with a series of lower highs and lower lows for the major stock indices. Ultimately, there should be a retest of the prior lows of 7197, 768, and 1108 for the Dow, S&P 500, and Nasdaq, at a minimum, this year. And I believe in the next year or two, the Dow could reach 6550 or 5700 while the Nasdaq could find 800-900.
First things first, and the highest probability of forecasting is for the shortest timeframe, thus, the following are seen as likely for January:
1)High range for Dow and Nasdaq: 8350-8450 and 1340-1380
2)Low range for Dow and Nasdaq: 7600-7900 and 1166-1221 (gap fills)
3)March USD 100-103
4)February crude oil $28-$39/barrel
5)March bonds 112-114
6)February gold low range $336-$344, high range $370-$379
7)Worst sectors: optic fibers, telecomms, internet
8)Best sectors: unhedged gold and oil/ oil drillers
Also, the first quarter should see these trends continue, after some resetting and retracements in part of February, with higher highs in those bull markets (e.g. gold) and lower lows in the bear markets (e.g. stocks) ensuing.
Until prices get parabolic in bull markets, retracements are sometimes stopped at 60 minute stochastics near zero as opposed to larger retracements/corrections when the daily stochastics drop near zero to 25%, and this is what mostly occurred in the gold market in November and December. It is imperative never to chase stocks or other trading vehicles when they get parabolic in either direction and to enter incrementally unless the setups are near perfect.
On Tuesday, the TA readings were little changed.
Here are some weekly charts/indicators for your perusal:
stockcharts.com[m,a]waclyyay[pb50!b200!f][vc60][iUh14,3!Lb14]&pref=G
stockcharts.com[m,a]waclyyay[pb50!b200!f][vc60][iUd20!Ll14]&pref=G
stockcharts.com[m,a]waclyyay[pb50!b200!f][vc60][iUo14!Lk14]&pref=G
stockcharts.com[m,a]waclyyay[pb50!b200!f][vc60][iUa12,26,9!Lc20]&pref=G
stockcharts.com
The blue chips as measured by the Dow, NYSE Composite and S&P 500 are stronger than the Nasdaq and have slightly better technicals, which leads me to believe that they could engineer a blue chip-led rally in the next few days as the institutions have not thrown in the towel yet and are still doing some buying.
Disclosure: Dr.Bob is currently short a large basket of stocks and ETFs, primarily technology stocks and including optic fibers, telecomms, and internets, and long a small basket of unhedged gold stocks, at about a ratio of 65%/35%. "I did lighten up (covered) about < to 1/3 of my short positions Tuesday morning (December 31, 2002) to reduce my exposure to a possible technical bounce or rally within the next few sessions because the very short term indicators are oversold."
Caveat: Technical readings and signals can change quickly and thereby changing my TA interpretations. Many believe that other TA systems are better, such as Elliot Wave Theory. The aforementioned forecasts are discussed in order to clarify my structured TA approach and do not represent actual recommendations to buy or sell any investment or trading vehicle.
Dr.Bob's commentaries are not to be construed as recommendations to buy or sell stocks, options, or ETF's as Dr.Bob is not a Registered Investment Advisor. Information and data provided here is believed to be reliable but cannot be guaranteed to be accurate. Always do your own research and due diligence before investing or trading. Remember that Technical Analysis can change by the day, and as such, one day's TA may not be the next day's TA interpretation.
Dr.Bob's mission is to teach Technical Analysis and demonstrate a structured approach to Market Analysis, for position and swingtrading.
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