BigTrends.com
Weekly Market Outlook
October 25, 2003
The selling was as strong as expected, but how much more downside do we have left?
Based on the charts, there's still a little room left to fall, but so far, the
intermediate-term bull trend isn't threatened. Exactly when we may hit the short-term
bottom depends on which index you follow
NASDAQ COMMENTARY
Three weeks ago after gapping from 1842 to 1864 (framed with gray lines), we felt
pretty certain that the gap would eventually be filled, as most gaps are. There was
plenty of disagreement with our view, as many felt that the official end of the bear
market and the strength of the new bull trend would allow such gaps. That wasn't the
case. This filling of the gap is an illustration of the difference between actual
bullishness and potential bullishness. The market obviously has the potential to stay
strong, but the reality is that the market is still very fragile. Recovering from
three year's worth of bearishness doesn't come easy, even a year after the ultimate
bottom. The point is, caution is advised in any market.
The good news is that the Nasdaq Composite did find support at the bullish support
line. This support level also happened to be the gap point, and we managed to claw
our way just above the upper gap level (1864) by Friday's close. This is actually a
pretty good sign of the overall strength of the market, as investors saw prices about
6.7% below the recent high, and decided that stocks were 'bargains' rather than
'falling'. Whenever there is more fear not to buy than there is to buy, things are
typically bullish.
The intra-day reversal wasn't a complete surprise, based on stochastics. In the same
manner that we became stochastically overbought in early October, we nearly became
stochastically oversold on Friday. This simply means that odds are in favor of a
shift from selling pressure to buying pressure in the next few days. We may see a
little weakness or choppiness during that time as both stochastic lines make their
way to sub-20 levels, but it shouldn't take too long. Note that the current chart
patterns look very similar to the ones we saw in early August and late September,
both of which led to bullish surges.
NASDAQ CHART
S&P 500 COMMENTARY
While the Nasdaq is right at its lower support line (and actually bounced off of it
Friday), the same can't be said for the S&P 500. The SPX is still about 25 points
above its support line, suggesting that there's still some room left for further
decline. To get all the way to the bottom of the bullish channel, we'd need to see
about a 2.5% drop in this index. This is not really a very comforting thought, but
that's the reality of it. The bulls may find hope in the possibility that this is the
one time where the Nasdaq and the S&P do NOT make the same chart pattern. We shall
ultimately see what the market is going to do, but no matter what happens, we don't
expect to do any worse than hitting the support line and then bounce off of it.
Technical indicators are in agreement with the possibility of a little more downside.
The MACD lines made a bearish crossunder at the same time the index crossed under the
10 and 20 day EMAs a few days ago. All three of these crosses are sell signals. The
stochastic lines tell the same story, as both lines are pointed towards the 20 line,
but neither are there yet. Ideally, the stochastic lines would fall under 20 at the
same time the index falls to its support level. This would be a textbook example of
using stochastics to trade a range-bound market.
S&P 500 CHART
BOTTOM LINE:
There's a lot of economic data coming out next week, which should really wreak havoc
on an already tense stock market. Investors who were bullish just last week are now
taking their lumps, and some are convinced that we're headed back into bearish mode.
The result is going to be a choppy market as the bulls and bears do battle next week.
Between this battle, GDP, the Michigan Sentiment Index, and the Chicago PMI, expect
things to get real interesting.
As stated above, some indexes are at their support lines while others are not. It's
the ones that are not at the lower support line that lead us to believe there's still
some more room to fall. The momentum is also negative. The one bright spot for the
long-term bulls is that these drastic pullbacks often end with bullish reversal that
are just as drastic. In fact, we saw an emergence of buying late in the day Friday.
Heading into November should also prevent stocks from falling too much further. As
before, keep an eye on support lines as the possible reversal points of this short
downturn.
Have a great trading week ahead.
Price Headley, CFA, CMT, President
With James Brumley, Research Analyst
Se não receio o erro é porque estou sempre pronto a corrigi-lo
There's no bull side and no bear side. JUST THE RIGHT SIDE!
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