Hello Fellow Chart Watchers!
The mainstream media has finally figured out that this Bear market is for real. What took them so long? ChartWatchers like you and me have known this for months. Bear markets like this show the folly of buy and hold and the real, tangible value of solid technical analysis. Any long-term investors who are still in this market has probably been listening to the "pundits" more than the charts.
Let's get back to basics and look at what a real market reversal will look like when it finally gets here. The Trend is your friend. It doesn't get any simpler than that. But what is a trend? Here's a common definition:
A confirmed downtrend is a series of peaks and troughs on a price graph where each peak is lower than the previous peak and each trough is lower than the previous trough.
On both regular line charts and on P&F charts a confirmed downtrend looks like this:
Note: Notice how the ZigZag indicator helps you stay focused on the significant reversal points? Point & Figure charts do the same thing automatically.
Once you are in an established downtrend, four key things must happen for a confirmed reversal to occur:
When things happen cleanly, it looks kind of like this:
Did you know that it's next to impossible to find a chart with a clean reversal pattern right now? ;-) Technically, the peak at #1 on this chart should be higher than 3.0 - the level of the last "downtrend peak" - but this is the best example I can find right now.
Note that on a P&F chart, things are simpler with only a 3-step process needed for confirmation.
Of course, things rarely happen nice and cleanly like I describe above. Even in this example, the stock "lingered" at the final #5 confirmation level for what I'm sure was an agonizingly long time for shareholders before breaking out (green box). As each one of the five conditions occurs, confidence in a reversal grows - HOWEVER - at any point in this sequence another breakdown can occur and things must start over.
"When will the bottom arrive?" my newspaper screamed at me this morning when I picked it up. "I don't know" I said aloud to no one in particular. "But I'm sure I'll know when it gets here" I thought to myself. Now you will be sure also.
Want to know more about the technical definition of trends? Here is a great, inexpensive book from Martin Pring that explains these concepts better than anything else I've seen. It includes a course on CD-ROM also.
In the interest of seeing if there was any sign of accelerated mutual fund redemptions, I have created a special chart that examines only bullish money in Rydex funds. The top panel shows the S&P 500 index. The second panel shows Rydex's Money Market asset flows. The next panel reflects the total assets in Rydex Bull plus Sector funds (ex-Precious Metals Fund). The last panel shows Cumulative Net Cash Flow (CCFL) for Bull plus Sector funds, an index that ignores the effect of the change in the value of fund assets.
Charts courtesy of DecisionPoint.com
At the beginning in 1998 both total Bull+Sector assets (BSA) and CCFL began at the same level. As of Thursday BSA has almost completed a round trip from about $800 million to $7 billion and back down to $1.2 billion. CCFL moved to a high of $4.5 billion in July 2000, then moved in a range between $3.5 and $4.5 billion from 2000 to the present, indicating that investors never really gave up.
There is currently $3.5 billion of cash that has gone into the Bull+Sector funds, but it is only worth $1.2 billion. This means that $2.3 billion (67%) of value has gone up in smoke. This is astonishing. In terms of possible capitulation, with only $1.2 billion remaining there is really not much left with which to capitulate. I'm not sure how much of this picture we can generalize to the whole market, but the amount of devastation is clear, as is the persistence of optimism.
The top panel shows all the money that has moved to money market funds. At $2.4 billion it is nearly twice the amount that is invested in Bull+Sector funds. This index is also pushing previous upside limits. Possibly the first sign of real capitulation and mass mutual fund redemptions will be when this index begins to set noticeable new highs.
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As reflected in their relative breadth statistics, selling pressure has been more extreme in the S&P 500 than the Nasdaq 100 over the last few weeks. Even though selling pressure may be lighter in the Nasdaq 100, the index has yet to show any real signs of buying pressure.
Charts courtesy of TDTrader.com
The AD Line for the Nasdaq 100 has remained in a steady downtrend since mid March. There were a few blips above the 20-day EMA, but the AD Line never made it above upper trendline. Even as the Nasdaq 100 traded flat over the last few weeks, the AD Line failed to show any sustainable strength. The 5-day SMA for AD Net moved to its highest level since mid May earlier this week, but closer inspection shows dwindling interest as the daily AD Net readings peaked on 5-July (gray arrow at +97) and declined with each positive reading thereafter. This was a telltale sign that buying pressure was weak and a breakout unlikely.
The AD Line for the S&P 500 also peaked in March, but did not begin its decline in earnest until mid May. The decline accelerated in mid June as the AD Line dropped 16 of the last 21 days. Since 19-Jun (gray arrow at -245), AD Net has been decidedly negative, more so that any time this year. Notice the concentration of blue lines below zero (gray oval). This tells us that selling pressure is spreading and intensifying, not narrowing and waning. Fridays reading was 418 and marked the third time this month that AD Net fell below 400.
For more of Arthur's intuitive commentary, check out his website: TDTrader.com Take your TA to the next level!
The focus of the past several weeks in the equity market has been nothing more than of the "emotional" sorts - a type of capitulation that doesn't end in one day, two days or even three days. Capitulation of this sort is of the "multi-month", and possibly "multi-year" variety - one that we haven't been witness to in many decades. Thus far, it has been relatively orderly, but given the current acceleration to the downside, we must believe that an even "quicker" move may be upon us - we believe yesterday's decline was clear and compelling evidence of just such a move. However, we are quite skeptical of the targets some technical indicators are showing - as they are projecting downside risk on the order of 50% of current prices. In terms of the S&P 500 - before all is said and done, and if history holds true, the final low could very well be somewhere near 400 if our simple moving average envelope holds true (more below). We don't believe it shall be a straight line, but one of "fits and starts". But we are skeptical of such a target, but we think the reality is that is a distinct possibility.
Charts courtesy of TheRhodesReport.com
We base our projection upon the S&P 500 monthly chart (log scale), which shows the bull market trendline having been violated three weeks ago. This in and of itself may have ended the bull market for all intents and purposes. And, with the confirmation of two "head & shoulder" top patterns, which have downside targets of 800 and 600 respectively - we must look to sell all counter-trend rallies as prices shall be technically inclined to move lower. In order to find our ultimate low based upon past highs, we note that the 60-month moving average has held the bull market trading action since 1982 - of which that condition is no longer present as it was resoundingly broken during Sept-2001. But, if one offsets this moving average into an envelope overbought-oversold ranges based on historical levels, one can clearly see that 68% above this moving average has allowed for identification of the "upper trading band". Therefore, if we apply this as a "lower trading band", our target becomes on the order of 400 - which may be too low to be taken seriously - but it must - for markets make a habit of overshooting whatever "reasonable" levels one may think of - tis the nature of markets to do so.
Good luck and good trading,
If you want more of Richard's award winning advise, check out his website: TheRhodesReport.com - Highly recommended!
HITS FOUR-YEAR LOW... The Dow tumbled 400 points today and, more importantly, finally broke last September's low. The Dow is the last of the major averages to fall below the lows of last fall. In addition, it was the worst percentage loser of the day. Chart 2 shows that the next downside target for the Dow is the late 1998 low. Other major stock averages have already broken their 1998 lows.
Charts courtesy of MurphyMorris.com
1998 LOWS ARE BROKEN... The NYSE Composite Index and the S&P 500 both cracked support at their 1998 lows. That puts both big board averages at the lowest levels in five years. Friday's price collapse also leaves little doubt that these averages have completed major "head and shoulders" tops that we discussed last weekend.
LONG TERM TRENDLINES BROKEN... Last week, we talked about several key market averages challenging 20-year up trendlines. Unfortunately, several were broken this week -- mainly in the NYSE and S&P 500 Indexes -- as shown in the chart below. This pretty much confirms that the "secular" bull market that started in 1982 has ended. That means we are now in a secular bear market -- which is usually much worse than the "cyclical" bear markets we've been used to for the past two decades. Notice that the price scale on the right is logarithmic, which means that it is based on percentage changes. That's why the scale gets squeezed as the numbers get higher. This differs from the normal arithmetic scale where each price increment is given equal weight. The reason we're showing this chart is because log scales are preferable for spotting long-term trend changes. And we certainly are seeing one -- to the downside.
John Murphy posts charts like these every day on his website, MurphyMorris.com.
Here are some links that should help you get started:
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