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.