By Wednesday we were well at the upper end of the resistance zone we were concerned
with. As a reminder, that turbulent resistance zone was between 1430 and 1465. It was
surprising that we shot through it so easily, but it wasn't surprising that we didn't
make it above it. The high end of the zone was based on the level at which we topped
out in January - at 1467. Lo and behold, this week our two high days were 1465 and
1468. Those previous highs have been tough to cross, and with plenty of economic
weakness, it wasn't going to happen this week either.
Based on Friday's price bar with an open near the high and a close near the low, we
can see the true tone of the market. Nobody has enough confidence to carry positions
through the weekend, nor are investors willing to pass on even the most modest
profits.
As we warned, the sell signal would come when stochastics entered into the overbought
region and started to fall back. This weeks chart shows the first step of the sell
signal; the slowK line (in green) has fallen under the slowD line (in red). The
signal will be confirmed when the slowK line falls under the 80 threshold. It won't
take much weakness next week to see that pattern - maybe as early as Monday.
On the flipside, we still are inside bullish trend lines, although most bullish
momentum has been lost. The DMI lines are still technically bullish, but with the
sharp convergence of the DMI+ and DMI- lines that started today, the bearish
crossover is not too far off.
Of most interest is the VIX. Low readings in the VIX are an indication that investors
are relatively fearless. However, knowing that investors are frequently wrong about
short-term outlooks, we have every reason to be fearful when most people aren't -
that's why we're bearish. It's no coincidence that the VIX bottoms out right as the
market tops out. After all, markets typically fall right at the moment nobody expects
them to. Unless you're living in a cave, you'll know that there are a lot of people
who are absolutely certain the worst is over. You can see on the chart what happens
when the VIX is excessively low - stocks fall shortly thereafter. We're expecting the
same this time too.
As a final confirmation, wait for the index to fall under its 10 day exponential
moving average at 1423. If it dips under the 20 day EMA at 1405, it's that much more
bearish. We'll find some support at these levels as many people don't want to admit
stocks can fall again, and they'll be buying to prove their point.
Resistance is at 1450 and 1467. Support is at 1423 and 1360.
Daily Chart of the Nasdaq Composite
DOW COMMENTARY
We're opting to illustrate the Dow Jones Industrial Average because of its 200 day
moving average. While most indices are above their 200 day line, the Dow has
struggled to get above it. Now that it has, it's struggling to stay above it. While
today's close was only marginally back under the 200 day moving average line, it was
enough to cause alarm.
Like the Nasdaq, the Dow had its resistance problem around 8500, hitting near that on
three separate occasions in the last few weeks. In baseball, after three strikes,
you're out. The market isn't much different After three attempts to break above 8500,
investors are starting to realize the stocks aren't going to experience a post war
boom. They're starting to head to the sidelines.
Unlike the Nasdaq, the Dow's stochastic lines have officially given the sell signal,
as the slowK line has fallen back under 80.
So, we're bearish on the Dow, and stocks in general. We do recommend waiting for
confirmation before going fully bearish. This will be confirmed by a close under the
20 day EMA line (the last possible support level), and may occur as early as Monday.
Support for the Dow is at 8300 and 8075. Resistance is at 8520 and 8850.
Daily Chart of the Dow Jones Industrial Average
Bottom Line:
Not a lot to say, other than most of the bullishness one could expect from earnings
season has pretty much played out. As you can read, we're pretty bearish, primarily
because everybody has been expecting a stellar market. The markets will rally when
nobody expects it. The one caveat is to wait for confirmation. If the coming week
closes lower than this week, that should be more than enough of an indication that
stocks are headed south. We may even see confirmation in the first couple of days of
next week - keep an eye on the Dow's 200 day line.
Also keep an eye on the economic data that will be coming out. GDP was under
expectations, and unemployment was quite high. Next week we'll get ISM and PMI data -
both are very telling indications. If all four of these show economic weakness, then
brace yourself.
Have a Great Trading Week Ahead!
Price Headley, CFA, 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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