***** Technical Analysis (for October 23)*****
There are certain paradigms I learned from futures trading, and a few of them are that:
1) Low volume rallies, especially within longer down trends, are not to be bought for position trades,
2) Always trade with the trend,
3) Always use stops,
4) In downtrends, look for bearish divergences at possible tops to short,
5) Use not only daily charts but also weekly and monthly to determine the longer term trend,
6) Use crossovers and double crossovers.
The current market environment from a technical standpoint is nearing a critical juncture in determining if the short-intermediate term rally can continue to much higher prices or if it is going to reverse from this level (or slightly higher) and then retest the recent lows of 7196, 768 and 1108 for the Dow, S&P 500, and Nasdaq, at a minimum.
The weekly and monthly charts indicate that the major indices are still in downtrends and until we have higher highs and higher lows, the retest of the lows has a very high probability.
There is a lot of speculation that the market will rally into the first quarter or into April due to favorable seasonality, but one should use a structured TA approach, and the overall technical data does not support this idea at this time. If the indications change, such as overall volume on rally days, then perhaps we will see a longer term rally.
For now, the rally is seen as just a technical rally within a bear market. Some has disagreed with the concept that a selling climax or capitulation is necessary for a bottom to this bear market to occur. A capitulation is not always needed for a bottom; however, when accompanied by other technical signals, a capitulation greatly increases the odds for a trend reversal to the upside, at least for a tradeable bottom of major significance.
The lack of capitulation giving a sign not to go long during many declines has saved my bacon frequently and will do so in the future. That does not mean that quick swing traders cannot capitalize on technical rallies from time to time, but that heavy exposure on the long side are risky without climactic selling or at least capitulation.
That being said, the October 9 low as well as the July 23 closing low did get the monthly stochastics, McClellan Oscillator and its 10% index extreme enough to signal a technical rally out of them. This rally looks a lot like the late July-August rally, as far as the charts and indicators are concerned. And it does not look like the rally that came out of September 21, 2001 that lasted for over 3 months.
Currently many indicators are appearing to be topping out, and while prices can trade a bit higher, the odds are starting to increase that the next major move may be down, not up.
The Dow has resistance at 8600 and 9000 while the Nasdaq has it at 1350 and 1425 now.
The Nasdaq McClellan Oscillator rose to +54 and it is in danger of a triple top now and then to unwind back down. The NYSE Oscillator is weaker at +23, a bad sign, as that indicates a lack of strong conviction by institutions for blue chip stocks. The Williams%R, slow stochastics, and CCI are looking toppy for a bear market and the Money Flow is not very impressive.
As mentioned previously, the market has a lot to prove technically to signal a bullish trend reversal. Unfortunately, it has not yet done so. Thus, the current rally appears to be a bear market rally that may fizzle out well before favorable seasonality ends in April, namely within the next 1-2 weeks.
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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