***** Technical Analysis (for October 2)*****
After hours the Hang Seng has dropped below 9,000 and the Nikkei is threatening to do the same as it traded just above that level, so technically the Far East markets are in shambles.
Here in the USA, the major indices have been trying to find a bottom but has not satisfied the technical signs of a final bottom. Eventually those who have been calling for a bottom will be right, but they have been wrong numerous times in the past couple of years as they have been whipsawed by the resetting mechanism of the supply/demand process.
Currently the major indices such as the Dow, Nasdaq, and NYSE Composite are seemingly forming descending triangles and some are in new down trend channels. While it is not impossible for the bottom to have been achieved and to invalidate the triangle formations, the technical indications are also appearing problematic right now.
The bullish argument from a technical standpoint is that there are some bullish divergences, such as the MACD, McClellan Summation Index, and the double bottom retest having been arguably successful so far as those levels have not been breached in a significant way.
However, there are stronger arguments for another downdraft in the days or weeks to come. The rallies have been on light or moderate volume and there has been no blast off of 4 heavy volume rally days.
Also, the major technical indicators not reaching extreme levels may not be bullish divergences at all, but could be indicating that they are resetting before reaching those extreme levels later. There has been no selling climax or capitulation to mark a firm bottom, thus a blase bottom formation that has occurred in some bear markets is almost impossible to discern.
Additionally, the sentiment indicators are not very extreme. Examples of that are the Investors Intelligence survey of bullish vs. bearish advisors, which is 42% vs. 34%. The VIX and VXN are only moderately high and their MACD's are not crossed up at this time. The CBOE put/call ratio has been neutral to negative for most of the past couple of months.
Today the McClellan Oscillator closed at -17, as it failed to turn positive in the past two weeks on rallies, and may once again be on its way to revisiting the -50 to -60 level on the Nasdaq and more extreme levels on the NYSE oscillator. The NYSE 10% index is below the 5% one again, a negative sign.
The Dow monthly stochastic is at 7% crossed down, weekly 10% crossed down, and daily 23% going up but the hourly is 58% going down, so the index may run into trouble again soon as the dailies cannot seem to ever get above 50%, let alone 70%. And the Dow ran into a brick wall at just below 8000 again.
The market continues to act as if there are negative events coming down the pipeline in the weeks ahead and as if the economy will run into trouble. One important rule is to not try to outguess the market because one is certain to be proven wrong.
The powerful rally yesterday had no follow-through today, which is another indication that this bear market has not run its course, and that we will once again make lower lows.
The price/earnings ratio of the S&P 500 could conceivably be cut in half by the time this bear is over (because most bears have ended near a p/e that is indeed half of the current one), but while I don't look for that to happen, the index could indeed drop from its 827 level today to break below its prior low of 775 and into the 700 or 650 area. Then we shall see if we get capitulation to give us at least a tradeable bottom for going long.
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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