***** Technical Analysis (for January 27)*****
The Dow fell below 8,000 and the Nasdaq to 2 points below its prior recent low support level of 1327, but the slow and fast stochastics are now very oversold and signalling a bounce.
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If If that occurs, then the question is how far up will the bounce take the indices and how long will it last, as opposed to whether it is a new major up trend.
The possible support levels are 8250 for the Dow and 1380 for the Nasdaq, while the S&P 500 is not as likely to reach its resistance level of 895 but could get back to 860 or even 875. We have to wait to see how the market internals shape up tomorrow, Tuesday, and how the close is.
Typically when the Summation Index gets changed by the McClellan Oscillator readings of -49 for the Nasdaq and -72 for the NYSE, the breadth momentum is so strongly bearish that distribution (declining) days will outnumber accumulation days by at least 2 to 1 for several weeks. Each week may have 2-3 bounces, lasting a few hours, and one rally lasting up to 1 1/2 days. But for the Summation Index to actually turn up and keep going up would take very strong accumulation by the institutions which is unlikely for now. Occasionally there will be an up week to reset.
There is a greater probability of resets of the major technical indicators as selling has to dissipate from time to time while supply/demand rebalances. These resets allow for a further continuation of the major downtrend that can last a longer time, and until sellers are washed out and there is panic selling with some capitulation/selling climax, there will not be a very good tradeable bottom from which to go long as a swing or position trader.
For Monday, the Nasdaq TRIN closed at a mildly negative 1.32 as technology stocks did not do as badly as blue chips. A/D was 10/23, up/down volume 1/3, indicating modest distribution, on light volume of 1.4B shares. This light volume is actually a bearish sign as there is no sign of much exhaustion of selling pressure.
The Nasdaq MACD worsened as did most of the others. The Williams%R, DMI, CCI, Money Flow, and Acc/Dist remained negative while the ADX allows for much more downside action. The RSI fell to 38.5 and it too could get much lower. The Aroon weakened and is hanging on to its neutral reading by a thread. The weekly stochastic is 56% crossed down and indicates the potential for a huge decline from here. The daily is at 10% for the "k" but the "d" is still high enough for more weakness in the next 1-2 weeks ahead before a major bounce occurs to reset things. The hourlies are 6% so a near term bounce is likely on Tuesday.
The NYSE TRIN closed at a very negative 2.31, as the a/d was 7/25, up/down volume 1/8, indicating severe distribution, but on light volume of 1.4B shares. The light volume decline would be more positive if it followed a huge decline that had had heavy volume and the charts and indicators were consistent with a bottoming formation.
The Dow weekly stochastic is 50% crossed down, daily is 2% for the "k" but the "d" is very high as well. The hourly is 6%, too, so that bounce should occur on the Dow as well. If the market internals are strong and last into the close, then it could turn into a technical rally of a few days and more upside potential.
The VIX and its MACD are rising sharply now, while the VXN is rising a bit less. The put/call ratio rose to 1.02 while its MACD still has a way to go before signalling a bottom is near. By the way, the MACD for the put/call ratio is a leading indicator for bottoms by a few weeks. The advisors are 50% bullish and 28% bearish according to Investors Intelligence, so that is no help to the bulls.
The market has had an impulse wave down and should have a corrective wave up soon, just as it has done many times in the 3 year bear market, but it has a long way to go as the final wave down has not been completed if one subscribes to the Grand Super Cycle ending in March, 2000. The bubble was overshooting to the upside and the market also overshoots to the downside. Additionally the Kondratieff Cycle theory tells us we are in the "winter" season of cleansing out the huge debt in the system.
But first things first, and we shall see if the technical bounce/rally is followed by another downdraft as expected, below Dow 8000 and Nasdaq 1300, perhaps to Dow 7600 and Nasdaq 1221 gap, before another temporary support level is found. Today's closes below 8000 and 1327 are bearish harbingers of things to come after a bounce or rally.
Gold, on the other hand, appears ripe for a pullback, as spot went to 379/oz over the weekend and is lower in afterhours as I write this, to 365 after trading up to about 373 today. Support may come in at 359, which was resistance before it was taken out, and then psychological support at 350. It does not appear that the gold stocks will have huge pullbacks now as they have rallied from a good bullish setup in the past 1-2 weeks and there are dip-buyers who have either missed this rally or sold out with profits and eager to get back in for the next move up.
Content (tax cuts and other economic stimulus ideas) within the The State of the Union address by President Bush and the anticipated enthusiasm that usually accompanies it may be used to explain any bounce or rally we have on Tuesday and/or Wednesday when the actual reason is more complicated than that and the up move is signalled by oversold indicators.
But there are stronger forces at work to cause any rally to fail and for sharper declines to follow in the weeks and months ahead.
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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