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RETEST
Chart Spotlight
by Carl Swenlin
DecisionPoint.com
February 20, 2009

The long-awaited retest of the November lows has finally arrived. The S&P 500 is still slightly above that support, but the Dow has penetrated it. Even though every rally since November has been greeted with intense hope of a new advance that would end the bear market, the market gradually rolled over into a declining trend after the January top.

The November bottom was also a 9-Month Cycle bottom. In a bull market we would expect the market to rally for several months. The fact that the rally failed so quickly, is a very bearish sign.

The longer-term view shows that the 2002 bear market lows are also being tested again, so the market is at a very critical point. Many people who are still holding equities (at a 50% loss) are counting on being bailed out by a big rally. If prices fall significantly below long-term support, we are likely to see another selling stampede.

The long-term condition of the market is deeply oversold, as demonstrated by the Percent of Stocks Above Their 200-EMA. This indicator has never been at these low levels for such an extended period of time. Normally, a rally is in the cards as soon as these levels are reached, but the market is flat on its back, and it is hard to say when it will recover. It is important not to get too anxious to get back in. We are in a bear market, and negative outcomes are much more likely than positive ones.

Also, remember that oversold conditions in a bear market are extremely dangerous. If the current support zone fails, a market crash could quickly follow.

The medium-term condition of the market is neutral. Note that the ITBM and ITVM charts below are mid-range and falling. This is not a level from which we would expect a powerful rally to be launched.

Bottom Line: The market is in the midst of a retest of very important support. Since we are in a bear market, I expect that the support will fail.

. . . .

MAIL

Hi Carl, redacted

I was hoping you could mention to your clients something about the following. After being extremely careful for the past year and a half, mostly in treasuries and hedged on what longs I have had, I had my account frozen at the _redacted_. Sure, everyone will say oh you didn't do enough DD, had you, you would have found enough suspicious stuff to not go with them, but my money manager who I have trusted for 20 years moved there a few months ago. I am mostly in treasuries. That acct got frozen Tuesday without a clue when the SEC might release it from _redacted_. I am diversified, have funds in various places so I will be Ok as this sorts itself out.

However,some people have their money all in one place and in this environment, I think that is taking big risks. It would be great if you could say something to your subscribers about diversification. I feel pretty stupid this has happened for me, but the truth is we are in extremely challenging times and we all need to protect ourselves as best as we can. It has made me heartsick whats happening in our marketss and world.

I think its totally unsafe to have all of ones money in one place and if you can tell clients that I think that would be great. I certainly didn't expect this by any stretch of the imagination (being in treasuries and frozen). I think the best we can do in these times is watch out for each other and that is my intention of sending this letter to various people that are in influential positions in the financial world. Thanks Carl.

ANSWER: I have redacted the names of the firms involved because I can't easily verify the statements. The main point is to not keep all your eggs in one basket. I personally am stumped as to where to put money except in a safe deposit box.

Something else worth mentioning is that brokerage account insurance is not as safe as many think. The Securities Investor Protection Corporation (SIPC) insures most broker accounts against loss to certain limits if the broker firm fails. The problem is in the small print. Cash is only insured if it is in the account for the purpose of buying securities. The SIPC gets to decide what you intended to do with your cash in the event that an insurance payout is necessary. To me that means that cash in your account may or may not actually be insured.

Carl

. . . .

Technical analysis is a windsock, not a crystal ball. Be prepared to adjust your tactics and strategy if conditions change.

© 2009 Carl Swenlin
Editorial Archive

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Carl Swenlin
President
DecisionPoint.com
Redlands, CA USA
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