***** Technical Analysis (for December 24)*****
A couple of changed technical signals concerns me for the bulls right now. The Money Flow and Aroon have turned decidedly negative in the past few sessions after having been neutral or bullish for most of the last 2 months. In conjunction with the McClellan Oscillator, 10% index, Summation Index, and the DMI (ADX) turning negative in recent weeks, the technical interpretation is that the rally from October 9 was a technical one and not the start of a new bull market.
The implication for the market if that is true is that we will likely have a weak market for the intermediate term at a minimum, and that we are more likely than not to ultimately retest the 7197, 768, and 1108 levels for the Dow, S&P 500 and the Nasdaq.
It has come to my attention that on the daily charts one could see a potential inverted head and shoulders pattern, which would have very bullish implications. That chart pattern is only confirmed when the right shoulder holds support and the rally out of it takes it to a high above the top of the head. We did not have a successful double bottom reversal for the major indices but rather, we had a lower low, especially on the Nasdaq. Nor did we have a selling climax or capitulation. While it is not outside the realm of possibilities, the inverted head and shoulders appears unlikely.
The bulls are stating that the decline has been manageable and has not accelerated and that it has only been a retracement of the rally from October 9. What they fail to realize is that the technical and momentum indicators have weakened substantially and that they may be rationalizing this decline because they want to believe it has only been a correction to this leg up in a new bull market. If they can provide bullish technicals, then let it be known. If they are right, then we will know it after the fact or after the bottom has long been set.
Now for some technical data. The market has not accelerated to the downside during the recent opportunities to do so. Part of the reasons may be the favorable seasonality, the oversold condition of the market in early October and for most of this year, and some support provided by fund managers. This lack of acceleration to the downside recently does not necessarily mean that it won't happen in the weeks to come as it takes time for tops to form and in the early stages of the downdraft stocks try to hold on for a few weeks while weakening a little at a time.
All of the major indices have quarterly and daily stochastics crossed down, negative MACDs-Money Flow-Acc/Dist-Aroon indications, and the Nasdaq and NYSE McClellan Oscillators-10% index-Summation Indexes giving negative readings and have done so for about 2 1/2 weeks.
The Williams%R and CCI have risen to neutral readings but are not far from negative readings on any weakness. They may be resetting rather than giving an indication that this decline is over.
If you count the waves from the 2000 highs, we are not yet done with them and there is at least one more major wave down. Cycles indicate that there may be a large trend development or change by mid-January.
One positive possibility is the adage that one should not short a dull market. I believe that is more true in a bull market but it sometimes is a good rule even in a bear market. We have had dull sessions for the past few weeks overall. Another is that the VIX and VXN are giving neutral to positive readings right now, having crossed down on their MACDs. But that could change fairly easily if the market declines in the next week or so.
The Nasdaq McClellan Oscillator dropped to -22 and the Summation Index has been heading lower for 3 weeks now and currently has a reading of -83. The NYSE Oscillator reading is -7 as blue chips have been faring better than technology stocks recently. As long as blue chips don't fall apart technically, this market should be able to avoid a severe decline. But they too could weaken soon as many uncertainties in the world are probably going to be negatives on the market.
Fundamentally the market is overvalued by the most important measures of valuation. This is one issue that many Wall Streeters have been misleading the public by as they say that the market is fairly or undervalued. The p/e ratio for the S&P 500 is twice that of its historical average and three times its bear market averages. Add to that the ratio of the market capitilization of all U.S. stocks compared to the GDP (which is 2-4 times too overvalued) and you can see how expensive stocks are.
The fall of the U.S. dollar, rising oil and gold prices, terrorism and its costs, and weak global economies are all wild cards which can hurt stock prices. Kondratieff cycle theory has described the 50-60 year economic cycles since the industrial revolution started in 1789, and its main premise is that the natural laws of economic cycles cannot be changed and that boom times are always accompanied by debt exploding and the debt has to be cleansed out of the system before another growth cycle can occur. This is correlated with Elliot Wave.
In the distant past, I have been an optimist and have seen only 2 year bear markets, but historically, there are secular bear markets such as the one we are in. Am I too bearish now? I get acccussed of being too bullish as well as too bearish.
So staying objective as possible and letting the market tell the trend are paramount to profiting in markets that move down as well as up, in contrast to what Wall Streeters tell you. You can make money in the market if you do not "buy Wall Street," but trade the market based upon technical analysis in particular. And always do your own technical analysis.
Dr.Bob's commentaries are not to be construed as recommendations to buy or sell stocks, options, or ETF's. 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, swing, and daytrading.
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