***** Technical Analysis (for November 11)*****
When I traded futures contracts actively over 15 years ago, I was guided by a broker who at that time was one of the premier technicians with the use of stochastics. She was way ahead of her time with her own software which she used to fax me many charts. She was my first teacher of advanced interpretations of stochastics, and I learned that getting proficient at a few technical indicators was better than trying to use many dozens of them.
What the daily stochastics seem to be saying now is that we are likely to have a bounce on Tuesday but that the next 1-2 weeks are likely to be down. Then we shall see if the action supports another technical rally or if we will turn the weeklies back down which would portend a major decline, perhaps to fill the gaps such as the one at 1162 (Nasdaq) and retest the lows of 1108. It is not common for the dailies to not continue their decline on the "k" stochastic from over 75% to 25% or lower during a long term downtrend, despite the monthlies and weeklies being crossed up. Sometimes they will turn back up temporarily and then do a double cross back down from lower highs.
The McClellan Oscillator for both the Nasdaq and NYSE have come down sharply to neutral territory, 0/-1, respectively, and their 10% indexes have dropped to just below the zero line and are about even with the 5% indexes for the first time in several weeks. On that basis, the market is at an important pivot point because if the breadth momentum indicator turns negative, it is likely to continue down for a few weeks at a minimum.
The RSI is at 51.1, right above the neutral 50 level, while the MACD for the major indices are neutral now and could go either way. One tip off for the Nasdaq starting a decline last Wednesday and Thursday was the rate of change, which had been giving a warning for about a week, and it usually is a leading indicator.
The sentiment had become bearish as well by having too many bullish advisors, which had risen from 42% to 48% in the last couple of weeks. The put/call ratio's MACD was also indicating we were closer to a top than a bottom. Now the VXN's MACD has crossed up from low levels which is a bearish signal as it has an inverse relationship with the market trend.
Furthermore, the Dow and Nasdaq had double tops possibly forming at 8770 and 1420-1426.
Now the true test will occur for the bulls because they have lost momentum after what appears to have been a technical rally of almost 5 weeks (starting October 9), the same amount of time for the prior technical rally from July 24 to late August.
For Monday, the Nasdaq TRIN closed at a very negative 3.37, with a/d of 8/23, up/down volume 1/10, which may sound climactic but it was on only 1.3B shares, on this Veteran's Day holiday. The MACD worsened to neutral, as did the Acc/Dist. The Williams%R and CCI remained neutral while the DMI (ADX) and Money Flow remained positive but were less positive.
The Nasdaq had closed just 1 point above the gap fill of 1360, so the direction was not determined to be decidedly negative yet, but with today's action of closing at 1319, the odds now favor lower prices going forward. The Dow fell below 8500 and now could reach 8250 or 8000 before any significant bounce.
Foreign markets could be portending more problems as the Nikkei has gone down to the 8500 area and Germany is flirting with a recession of its own.
And fundamentally, the price/earnings ratio of the S&P 500 is more than twice as much as the historical average (36 vs. 17) and about three times the average at market bottoms (36 vs. 11). Also, the ratio of market capitalization to GDP is also about twice that of the historical average (1.08 vs. .58) and the ratio has been as low as .25 during several bear markets.
Now an important question is whether institutional managers (mutual and pension fund) can manuever another rally of consequence before an almost inevitable retest of the October 9th lows occurs later on, or if we will have only bounces on the way down.
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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