***** Technical Analysis (for December 30)*****
Traders sometimes place too much emphasis on daily fluctuations just like investors place too much emphasis on long term buy and hold as a philosophy and on fundamentals, which can change and be portended by trend changes.
The evidence during the 2 months rally out of early October was that it was another technical rally within a bear market and was more a function of favorable seasonality and an oversold condition than from fundamental changes in the economy or earnings.
What you learn is that the short-intermediate term (2 weeks to 2 months) and the intermediate term (2 months to 6 months) in particular are little affected by daily news announcements about economic data (which can change from month to month), but that the media and novice investors seem to want to find a 100% correlation or cause as to why prices rose or fell that particular day.
There are too many factors affecting supply and demand to discern one reason why prices moved up or down. It is much more important to understand how to interpret the technical data to determine the trend of the market in different timeframes and to learn the technical setups and signals that make trades more likely to be profitable.
That said, there has been overwhelming evidence since the Spring of 2000 and every 3-6 month time period after that, that stocks were in at least a cyclical bear market and this year it became apparent that we are in a secular bear market instead, which has important long term implications.
In the past month, the technicals worsened virtually every week from the December 2 highs, and in the last 5-7 sessions there has been confirmation of a new downtrend as we have obtained a series of lower highs and lower lows once again. The Dow has failed to take out 9077, and made a lower low at 9043, while the S&P 500 did something similar at 965 and then 954, while the Nasdaq was the lone index to make a higher high at 1521 but has since fallen sharply as have its technical indicators.
Today we are oversold once again, as the daily stochastics for the Nasdaq and Dow are 5% and 10%, respectively, and their "d" stochastics are nearing typical lows. And the slow and fast stochastics as seen at stockcharts.com indicate that we are due for a technical bounce or rally. Watch the market internals during the bounce to determine if it will turn into a full-fledged rally or not.
The problem is that resetting during bear markets (particularly at the beginning of a new downtrend as defined by price declines and early bearish reversals in the indicators as we have seen recently) may be brief and shallow, and a stochastic "drag" may occur. "Drag" is my term for the opposite of a stochastic "pop" wherein the stochastics can fluctuate between 50% and 0% for several months, on the dailies. In other words, the stochastics drag at the bottom range below 50% while prices make lower lows with only brief technical bounces and fewer technical rallies.
It is possible that we are entering a new downdraft after a technical bounce within the next day or two. That bounce could last a few hours or a few days, but in retrospect, it may be of little consequence to all but daytraders.
The Nasdaq TRIN closed at a negative 2.07, with a/d of 13/20, up/down volume 5/16, on light volume of 1.1B shares. The RSI was little changed at 41.5 while the MACD, DMI (ADX), Money Flow, Acc/Dist and Aroon remain quite negative. The Money Flow in particular has worsened severely in the past week.
The Nasdaq McClellan Oscillator dropped to -33, with the 10% index well below the 5% one, and the Summation Index appears to be in a new decline, at -158. The weekly stochastic is 56% and going sideways with a crossover either way possible but it is coming from higher levels, increasing the odds slightly for a crossover to the downside, which could be disastrous for bulls.
The NYSE TRIN closed at a neutral .94, with a/d of 9/7, up/down volume almost as good as 3/2, on 1.0B shares, as blue chips have been relatively stronger than Nasdaq stocks in the past few days and the last 4 weeks. The Dow weekly stochastic is barely crossed up at 60%, and getting weaker.
The McClellan Oscillator is at -10, with the 10% index just barely below the 5% one and the Summation Index is in a slight downward trend at +285.
The VIX is at 32.5 and its MACD is a little crossed up. The VXN is 46.5 and crossed down still, thereby not confirming the negative reading for the VIX at this time. The put/call ratio dropped to .72 and its MACD gives a negative reading. Advisors remain too bullish.
The US dollar is having a bounce while the bonds and gold have weakened a bit recently, but the latter two probably have more upside potential in the weeks to come. London spot gold may find support in the $329-336 level and then rally once more to at least $355 in January. A few more days of a lower trading range might provide a base from which to rally.
The indices are below their 200, 50 and 10 day moving averages, and a technical bounce could turn them up to the 10 and 50 day averages. But the major market indices are just hanging on to prevent a very bearish signal being made from a technical standpoint.
The Dow has major resistance now at 8650 and then 8770, and has a lot to prove in order to signal a reversal of the deterioration of technicals and the recent chart pattern. The same holds true for the S&P 500 and Nasdaq, which have significant resistance at 895/960 and 1420, respectively.
If the Dow closes below 8250, the S&P 500 below 865, and the Nasdaq below 1320, selling could accelerate. We could get a decent bounce off of those levels but on the day the indices reach those levels, the market internals will provide the clues as to whether those support levels will hold or not. If the stochastics "drag" at low levels, we will almost certainly visit much lower levels in January and February, such as Dow 7950 and 7600, and Nasdaq 1221 and 1162 gaps.
Dr.Bob's commentaries are not to be construed as recommendations to buy or sell stocks, options, or ETF's as Dr.Bob is not a Registered Investment Advisor. 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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