***** Technical Analysis (for September 30)*****
The Dow traded below the July 24 low of 7532 for a while this morning but then rallied mid-day to close at 7591. That close was well below the opening price, which is still a negative sign. Any rally could cause a descending triangle formation. The S&P 500 traded as low as 802 but it never threatened its July 24 low of 775 as some blue chips have held up relatively well. They are likely to crack eventually.
It has been discussed here that the Nasdaq had a magnet at 1192 and that the major indices had a good chance at a retest of their July lows. Only the S&P 500 has held above its lows but it would only take a couple of more down days for it to be retested too, and if it does retest, then the Dow and Nasdaq will break down badly below their recent lows.
The trouble with the current technical condition is that the market indices are very low but the indicators are not oversold nearly enough to mark a bottom if history is any guide.
Case in point: the sentiment indicators. The VIX and VXN are not too close to their extreme levels of 55/70 at this time. The put/call ratio has finally become neutral after having given bearish readings for months, but it has not turned positive. While the American Association of Individual Investors index has given a more favorable reading of late, i.e. 47% bears vs. 24% bulls, it is not as good as the Investors Intelligence index of investment advisors, which show 42% bulls vs. 34% bears currently.
The Nasdaq McClellan Oscillator is only -21 today, a far cry from the -50 to -60 levels considered extreme. The 10% index is approaching extreme levels but it has not spiked down enough yet. The DMI (ADX) is also starting to approach extreme levels but it is not there yet, especially the ADX. The RSI for the Nasdaq is only at 35 and usually gets at least to the low 20's before a tradeable bottom is in. The bullish arguement is that there are some bullish divergences, but that is a dangerous argument in light of the overall evidence that we are definitely as risk of more downside action.
The Dow monthly stochastic is now at 3% going down so it is indicating that it too is approaching a desireable oversold and extreme level, but it isn't there yet either. The indices are not extremely parabolic compared to their moving averages yet, despite the sharp selloff in September.
The mid-day rally today probably just delays the inevitable spike down that we are likely to see in the weeks ahead. As a technician I would like to see a straight acceleration downward for the market, it rarely does that but rather tends to drag things out.
The Nasdaq has a gap above at 1198 but it appears to have a descending triangle formation occurring and it implies a bad break to much lower prices. That would imply that the Dow and S&P 500 would follow suit, despite the technical bounces that naturally occur. A bounce could occur Tuesday on the heels of the late rally, but it is unlikely that any bounce will turn into a full-fledged rally at this time.
While capitulation is not guaranteed to occur, it is hazardous to go long before one gets that signal, if one is a position trader. Daytraders and fast swing traders can make money long or short, with or against the trend, but position traders and longer term investors may wish to be cautious until we get a good signal of a possible tradeable bottom. The only way to know for sure if a bottom has occurred is after the fact, but selling climaxes result in very high odds of a strong ensuing rally.
Dr.Bob's commentaries are not to be construed as recommendations to buy or sell stocks, options, or index vehicles. 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 or forecast.
Dr.Bob's mission is to teach Technical Analysis and demonstrate a structured approach to Market Analysis, for position, swing, and daytrading.
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