Long-Term Bears Watch Out

This chart (click on it to actually see something) should give pause to any rabid, long-term, it's-only-down-from-here, this-market-is-never-coming-back type of bear. On the weekly chart, the Dow Jones Industrial Average successfully tested a major rising support line. It broke it intra-week but that only makes it all the more important that support did hold on a weekly basis.

Adding to the bullish evidence the facts that:

- it did it with the highest volume in months
- the latest 2 weekly bars form a bullish engulfing pattern
- the 14-week RSI is turning up from an oversold level

and one can honestly argue that a very significant low was established this week.

Now I haven't turned bullish all of a sudden. For that a lot of technical things must happen such as the May high must be taken out and this past week's low must be successfully tested and we're far far from that yet. I'm just saying this could be the start of a multi-month bullish move and... just be careful on the short side.

Very succinct, to the point and illuminating post on Tim Knight's Slope of Hope blog going through every conceivable scenario for what the market has in store for us in the coming trading days.

Tim seems to be of the opinion (which I share) that the market does not NEED the VIX to go above 30 for a bone fide rebound to take place BUT... that it would sure be better and embark more people (suckers?) on the rebound rocket. He also thinks his baby the Russell 2000 Index (and its attendant ETFs IWM and the turbo-charged UWM) will be the one doing the most rebounding. I'll stick to the Qs.

The Very Long Term View

If we take a step back for a second and go way up the timeframe arpeggio to the monthly view, we have this pretty nasty looking chart staring back at us.
This monthly chart of the SPY (click to enlarge) with its attendant MACD indicator leaves no doubt as to where we've been (the glaring double-top) and where we could be headed as things stand now (the late 2002 lows around 76).
Obviously, things could change but reversing the built-in momentum present in this monthly chart will be a long and arduous affair. No one-day (or one-week or one-month) reflex rally will be enough to undo the damage incurred over the past year. Only a sustained rally above the May high above 145 could begin to spell the end of this bear market, maybe. What's most troubling is the striking similarity so far between this bear and the 2000-2003 one.

Barron's Bashing (part 99)

Today's Barron's has on its cover a big bad snarling bear with the caption "THE BEAR'S BACK" then in smaller print "But there's no need to panic".

What's interesting about this is that on 4/28, the cover showed a smiling bull, in swimming trunks, dipping his left foot in a swimming pool under a bright blue sky (with, I'll give them that, a few barely noticeable minuscule bear-shaped clouds - cute I must admit). The headline read "FEELS GOOD" followed by "the water's looking calmer for stocks" all but inviting you to "wade back in" the stock market. This a mere 3 weeks (and a mere 100 DOW points) before the DOW double-topped just above 13,000 and then proceeded to swoon 2000 points to just above 11,000 where we are now. And this while some bloggers (shameless plug and blatant lack of humility) were yelling "Time to Get Short Again" .

So...are the same guys who told us to buy at the (intermediate) high to be listened to when they tell you to buy 2000 points lower and with the DOW in free fall? Hey, weirder things happen all the time in the markets but I'd be extremely careful.

P.S. If there is one article worth salvaging out of this week's Barron's, it's the guest appearance of Lawrence McMillan in the Striking Price column. I leave you with his very wise concluding paragraph:

"This market decline probably will end as all others have - with traders panicking and the VIX spiking upward."

A Few Technical Musings on these Crucial Times

The least one can say about the current state of the financial markets is that we are at a momentous juncture, as evidenced by the twin Dow Jones Industrial Average charts above (click to enlarge), the first being the weekly and the second the daily.

The weekly chart shows that we are pretty much right on the trendline that connects the two lows (October 2002 at 7197 and March 2003 at 7416) that formed THE double-bottom that propelled the 2003-2007 bull market. That would argue for some type of rebound in the very short-term. This popular view is substantiated by the extreme oversold situation seen in the daily chart. The 14-day RSI is double-bottoming at around 25 and, should there be a potent catalyst, the rebound could very well be explosive.

However, there are many caveats to the forceful rebound scenario:

First, staying with the daily chart, one must acknowledge the fact that support around 11,700 was decisively broken last week. That support was all the more critical in that it was formed in January during the Societe Generale rogue trader incident and then held in March during the Bears Stearns collapse and subsequent Fed-engineered bailout. Not to mention the fact that a majority of market players were convinced (and the ensuing 12% rally attests to that conviction) they had seen THE low. So we have a previously hugely significant support that automatically becomes a hugely significant resistance level to contend with.

Second, both the 20-day and 50-day moving averages (always consequential) are falling fast and, should the potential rally procrastinate, will act as strong resistance and again prevent the DOW to make it too far above 11,700.

Third, if we go back to the weekly chart, one quick and dirty observation there is that the 14-week RSI (at 34.49) is still way above the 23-level reached in 2002.

Finally, and I feel compelled to mention this because so many traders and analysts have this on their mind, the VIX (at 24.76 as of this writing) is nowhere near the 35+ level it reached at previous intermediary lows. For more detailed and intelligent commentary on the VIX and its significance as well as the necessity (or not) of seeing a 35+ VIX before getting a rebound, I strongly advise you to refer to the Daily Options Report and the VIX and More blogs, in particular this post and this one.

What does all this contradicting evidence tell us?
Most likely that there could very well be a strong rally in the next few trading days. However, with all the resistance overhead, I can hardly picture (or chart I should say) the DOW getting even close to 12,000.
On the downside though, the 10,000 mark could prove to be an irresistible attraction in very short order.

Since it's been quite a while since I've said anything about Barron's, how about a little Barron's bashing? See next post.