Following is a technical opinion of the US stock market for the next few months. Below is the 3 year weekly chart of the S&P 500 index. What is apparent is a topping pattern similar to a multiple head-and-shoulders (HAS) reversal pattern. The low made in January of 2008 was a lower low than either of the lows made in August and March of 2007. The appearance of what is a lower low, in my opinion, puts the long term benefit of the doubt on the side of the bears. Since the post-Martin Luther King holiday “mini-capitulation” suggested last month, the market rallied from below 1300 to Wednesday’s level of 1360. In magnitude terms (so far) this rally has been fairly benign as you can see from the chart below. In duration terms, the last down leg off of the right-most completed shoulder lasted about 6 weeks whereas the rally has lasted about 4 weeks. After a 4 week rally, with the index now at what may be considered the proposed lower neckline, it would be totally logical and technically appropriate that the rally stall out soon without much further advance.
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However, a rally back to the second (higher) neck line in the chart above is probably the more likely scenario. Such a rally would support the typical symmetry of the multiple HAS reversal (described in more detail in this link). If this does occur, the volume trends will be important, as increasing weekly and daily volumes will tend to support a more bullish long term picture for the US stock market, and diminishing volume would tend to support the continuation of the downtrend defined by the multiple HAS reversal. Based on a premise of a rally back to the 2nd higher neckline, the next important level for the S&P 500 would be at about 1410.
Is there more evidence to support the multiple HAS reversal presented above? One can argue that the S&P 500 appears to have failed to make a new all time high, and the now the failure looks decisive. Here’s the argument illustrated in the decade line chart below. You can see that the S&P 500 hung around near its all time high for several months in 2007, and made two weekly “print” all time highs before failing miserably. This tends to support the case for 2007 being a major top in the S&P 500 index.
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Is there a technical event that would tend to support a bullish scenario for the stock market? Such an important factor is the ability of leaders to lead. Two such leaders consist of Nasdaq stocks and those of emerging markets. A continuation of the long term linear uptrend in emerging market stocks would support the bullish case. The trend is illustrated below.
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In addition, the performance of the formerly leading Nasdaq stocks compared to that of the relatively more defensive Dow Jones Industrial Average, appears to now be in an “oversold” position, as illustrated in the ratio chart below. This near term underperformance was driven by ugly performance in such formerly leading stocks as Google, Research in Motion, Garmin, Apple, and Amazon.com. If stocks such as these cannot regain their leadership position, it would not bode well for the market in general. And from the bullish perspective, the opposite is also true.
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Today’s Market
Most markets were down today on light volume, led by the small cap Russell 2000 which was down by almost 2%. One point lost in the discussion above is the fact that if the market fails at the lower of the two necklines and then resumes its downtrend, it will not bode well for the longer term outlook for the stock market. Today’s action by itself probably didn’t amount to much significance. For what it's worth, the price action was bearish, opening near the day’s highs and closing on its lows. There are many “indicator stocks” in the technology sector. These are important stocks that sit near technically important levels. One such example is Oracle, where the /share support has been threatened for several weeks. It closed at 18.81 a share today – not decisively breaking the 19 level. What you see in the chart below are two scenarios for Oracle. If the market follows the multiple HAS scenario, then 19 should be strong support in the days ahead (and the market will probably rally back to the higher neckline). If 19 is surrendered over the next few days, this would further confirm that the market looks to be particularly weak. The “if” should be resolved by the time Oracle reports their quarterly results and this is expected to occur in mid to late March.
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The most practical conclusion from this discussion is that the US market is now in some type of corrective pattern which is difficult to trade. This is unlike the trending market found in gold and precious metals where it can be concluded with certainty that they are in an uptrend. There is no use trying to win in a league that is difficult when the game is easier elsewhere.
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