***** Technical Analysis (for March 31)*****
The weakening technicals for the market are seriously questioning how much of a rally can occur on good "war" news in the weeks to come. Most of the war "premium" in stock prices may have occurred, and the focus will be on corporate earnings and guidances, economic data, and the global economies which are in dire straits as evidenced by the second and third largest economies (Japan and Germany) being very close to recessions right now.
Thus, fundamentally, the stock market is in bad shape as valuations are still high and the U.S. and world economies are stagnant, plus the long term technical charts and indicators continue to be negative and bearish.
The odds of this rally being the start of a new bull market are almost nil, so the real question is how far can this technical rally within a bear market go, and has the top been put in?
The weekly and daily stochastics crossed down in the past week for the Nasdaq, Dow and S&P 500, thereby implying that the top is in. The inability of the market to reassert itself late last week told me that we would not retest the March 21 highs as first thought.
Now the Nasdaq McClellan Oscillator is at a precarious +8 after having been +47 on the 21st and +50 for the NYSE Oscillator. The 10% index on the Nasdaq is below the zero line now though it is barely above the 5% component.
While the Nasdaq has gaps above now at 1367 and 1403, there is a good chance that both won't get filled, and that the index will retest their recent lows, and ultimately their October lows (1108), as will the Dow (7197) and the S&P 500 (768).
In the meantime, the Dow should retest the 7600 level in April and probably the 7400 support level as well. For Tuesday and Wednesday, there should be a technical bounce, and it would take very good war news to achieve a technical rally of 1-2 weeks now.
The reason that we may only have bounces now is that the bullish momentum has weakened severely. Besides the McClellan Oscillator and weekly stochastics, the DMI (ADX) has turned negative from positive today, the MACD has just barely turned negative, and the RSI fell below 50 on the Nasdaq.
The CCI and Williams%R have worsened from being almost positive to mid-way neutral with lower highs. The Money Flow and Acc/Dist remain positive but also have weakened. The Nasdaq is now just about at their 200/50 day moving averages (1342/1335, respectively), and risk crossing over again as they have done numerous times after rising above declining moving averages, a bearish sign according to Dow Theory. It is below its 10 day and hourly moving averages.
The Nasdaq TRIN closed at a negative 2.11, with a/d of 2/3, up/down volume 1/4, indicating moderate distribution, on moderately light volume of 1.6B shares.
The NYSE TRIN closed at a very negative 2.54, with a/d of 13/19, but u/d volume was 3/11, indicating distribution, on 1.4B shares.
The hourly and 30 minute stochastics are oversold and so we should get a technical bounce early tomorrow, but unless the up/down volume figures are quite good and breadth is better than 3/2, we could see more selling later in the session.
The Dow did manage to rally after declining below 7950 support intra-day, but it closed below 8000 by 8 points and well below its open.
I don't want to be an alarmist but this rally has lost so much of its momentum, and any rallies are likely to be ephemeral. If and when the McClellan Oscillator drops below zero and follows through, the indices are going to fall precipitously as they have twice each year for the past 3 years of this secular bear market.
The Kondratieff Winter, high valuations, deep and serious global geopolitical and economic problems, pension underfunding, and worsening technicals would appear to cause major downdrafts in our marketplace for not only stocks, but also other bubbles such as the U.S. dollar, real estate, and the bond market.
In the Summer of 2001, there was a chance of the market being in a cyclical bear market but after lasting more than 1 1/2 years, and being accompanied by accounting scandals and then the tragedy and world change of 9/11 of 2001, it was apparent that we were in a secular bear market and that the Kondratieff cycle was in effect.
Ultimately a Dow falling to 4000-5000 within the next 2 years or so would not be a surprise, and to do that, we might eventually see a Dow drop of close to 1,000 points in a day, as MMM, IBM, and PG are so high priced and overvaled.
But for now, we should see resistance at Dow 8050-8150 (barring any good war news right now) and lower targets of 7600, 7400 and 7197, in the second quarter, which I mentioned in January and I stand behind that forecast (although I thought we had a good chance of retesting 7197 in the first quarter and only got to around 7400).
The lower highs on the technical indicators and negative divergences now showing up are very bearish harbingers of things to come, in my technical opinion. And companies with no earnings or very high p/e's will be very vulnerable to any future downdrafts.
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 and swingtrading.
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