***** Technical Analysis (June 10)****
This is an important TA update. The market made a low 4 weeks ago, rallied for over a week and has now dropped again to retest those lows, mostly breaking down below support levels, despite Thursday's positive reversal.
As most technicians agree on, the Grand Supercycle ended in March, 2000 for the Nasdaq and in the next two quarters for the S&P 500 and Dow, thus the new Wave 1 (down) started then and ended in March, 2003 for all indices, with Wave 2 (up)starting then and may have ended in May, 2006.
I had thought Wave 2 might end in August/September, 2006 or early next year, but the market action of the past month makes me infer it ended in early May, leading to Wave 3 (down) starting then. Wave 3, when it occurs, is very severe.
For those who read my TA column at Raging Bull in early March, 2000, remember that I wrote, "The Calm Before the Storm," wherein I believed the market was in for a major correction in late March or April as it was getting parabolic. In actuality, it was the end of the great bull market and the beginning of the secular bear market.
In the past couple of months, I have written here that the Spring rally was a rally not to be trusted for the long term but that it would lead to a correction. I appear to have once again underestimated the severity of the downtrend, and was not bearish enough during the late May bottom. Just as we had a technical rally at that time, we appear to be due for a technical rally very soon.
The short term of 1-10 sessions should see a technical (corrective, not impulsive) rally, perhaps leading the Nasdaq back to 2200 or to or close to the 200 dma near 2235, with a smaller chance of filling the gap at 2270. The S&P 500 could have have its rally top out near 1290 or slightly above.
The short-intermediate term trend of 2 weeks to 2 months appears problematic (i.e. down), as the weekly indicators and trends, such as on the link below, show that the market has momentum to go down farther:
stockcharts.com
(change this chart to $compx, weekly charts, and add TRIX to the slow stochastics and MACD) to get the best chart)
On the dailies, it appears that a technical bounce/rally is now occurring, after stocks met criteria for a selling climax/capitulation (mid-day Thursday), with a/d at 1/10 and u/d vol at worse than 1/15 at one moment, on heavy volume. See below:
It is troublesome that there was not a sharp, key bullish reversal at that time, nor was there a general market sentiment of panic and "sell at any price" mentality. The selloff was rather orderly, which is not indicative of a total capitulation bottom, but rather of a temporary bottom.
Weekly and monthly stochastics and MACD's are crossed down, portending an intermediate term downtrend. OBV is starting to turn negative as well, which is usually the kiss of death for the markets. EMA's for the weeklies and dailies are bearish.
IBD shows the Public/NYSE Specialist Short Sales ratio at 7.26, which indicates that the specialists are a lot more short than the public, an extreme reading, that tells us that they are not close to buying but are still very short.
IBD shows ratio of price premiums in Puts vs. Calls is at .65, a medium reading that needs to get below .30 or so to indicate a bottom.
IBD shows VIX is at 18.2, and needs to be at least over 30 and preferably over 50 to indicate a bottom.
While the put/call ratio has been close or over 1.00, that has given false signals lately and can be over 1.00 many times in a bear market.
Thus, these technicals do not indicate that we are at or near an intermediate or long term bottom yet.
Ralph Acampora and some other technicians believe this decline is more than a correction, but rather is a cyclical bear market, lasting several quarters if not 1-2 years, and that the cyclical bull that started in March, 2003, is over.
It now appears likely that Dow 10,000 to 10,200 will be tested in the next 2-4 months and the Nasdaq will test 2,000 and S&P 500 the 1200 level. Semiconductors, biotechs, and other more speculative sectors, will be punished the most.
I am disturbed by the fact that the Nas Weekly Summation has not yet reached -600 to -800, and that its MACD remains crossed down, with more room to go:
stockcharts.com[m,a]waclyyay[pc30!c20][vc60][iud20!ua12,26,9]
The Nasdaq McClellan Oscillator and Summation Indexes are still negative, the McClellan Oscillator failed to hold above the zero line on the recent rally, and is now portending more weakness ahead vis-a-vis technical bounces/rallies from time to time:
stockcharts.com
These breadth and breadth momentum indicators were in negative territory for most of the 3 year bear market from March, 2000 to March, 2003, going back and forth from extremely oversold to neutral.
I am also disturbed that there was not a strong enough bottom made 2-3 weeks ago with a selling climax and that the ensuing rally has failed miserably.
For the time being, until a successful double bottom retest and/or a true selling climax occur (and these are likely to occur at much lower prices), one should be very nimble as a fast swing trader and not be little invested, or should be selling/shorting the technical (impulse) rallies. A tradeable bottom for position traders is weeks or months away.
Even IBD says that we are in a downtrend, and they are rarely bearish on the market. William O'Neill's research has indicated that after a potential bottom has occurred with a reversal day, you need follow-through with conviction by the 4th day after, and last Thursday qualifies as the first day due to the strong bullish key reversal. That means the market needs to see a strong rally day by Tuesday or else the Thursday key reversal will fail and the market will likely retest its lows of Thursday, at a minimum. This 4 day rule is accurate about 80% of the time.
We also need to see the VIX and VXN at much higher levels, and sentiment to be much more bearish, and be bearish for a while.
If we truly are in a Wave 3 now, the Intermediate term trend of 2-6 months is down, with a series of lower highs and lower lows, as well as the Short-intermediate term of 2 weeks to 2 months.
The Kondratieff cycle proponents believe that we are in a very long period of deflationary pressures as the "K Winter" kicks in, having barely started in the year 2000. If true, then the commodities' bull market is over, having its bubble burst last month, and would mean that Don Coxe, Jim Rogers and other commodity bulls are wrong. While they have been right the last few years, it does not mean that they could not be wrong this time. The cycle (including all four seasons) averages 55 to 60 years, can be a little longer or shorter, and the "winter" might be 8-15 years long, sometimes longer.
I had believed that China and India would not reach overcapacity until next year or the following year but I am re-examining that thesis now.
The commodities are either having a very large correction or or entering a bear market. China and India are either slowing down temporarily to be followed by another boom in growth and demand for materials, or their growth has topped out and on its way down. The technicals of the commodities markets will signal which one proves out.
For the sake of those who are long and plan to remain long traditional stocks, I hope I am wrong for their sake (but TA does not use hope), and the market will tell us in the next few weeks if has indeed started.
One should not ignore the plethora of intermediate and long term technical data and signals.
Trying to remain objective, the above TA is my take and is the result of my deeper analysis done this week.
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. There are many other TA structures, strategies and systems.
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