The major U.S. stock market indexes have lost roughly 12% to 25% this year, a painful setback after two years of gains. Time to buy? Not so fast, based on a technical analysis of current market conditions.
Andrew Addison, a veteran market technician, proprietor of the Institutional View research service, and a sometime contributor to Barron’s, sees more downside ahead for the Dow Jones Industrial Average, the S&P 500, and the Nasdaq Composite, given the dearth of stocks resisting this year’s selling pressure.
Unlike fundamental analysts, who try to determine asset value by studying financial or economic factors, technicians examine chart patterns, and trading volume and other statistics to identify likely turning points. “When markets are about to make a meaningful turn, you find that the action in the index is camouflaging strength or weakness beneath the surface,” he says.
At the moment, there is no camouflage: Things have been ugly, above and below.
There is no evidence that more stocks are reversing their downtrends as the broad indexes fall, he says. Nor has there been a “meaningful contraction” in the number of stocks hitting new lows, or a notable increase in the percentage of stocks trading above their 50-day or 200-day moving averages. “Until the market’s internals improve, any rallies are likely to be short-lived, like a tropical rainstorm,” he says.
Technical analysts also study support and resistance levels, points at which investment demand or supply has stopped selloffs or rallies in the past. Addison sees support for the Dow around 29,000 to 30,000; the blue-chip average was around 31,950 on Friday.
Now that the S&P 500 has broken below 4050, downside risk is 3800, and potentially 3600, based on his reading of the index’s chart. A decline to 3800 would imply a loss of 4.8%, based on Friday’s price of 3990.
Addison has spent a lot of time studying the Nasdaq 100, a market-capitalization-weighted index of the 100 largest nonfinancial companies listed on the Nasdaq, and a proxy for the growth stocks that drove the bull market to dizzying heights. At a recent 11,945, it is getting close to support, he says. “We could see the Nasdaq 100 start to stabilize around 11,000,” he adds, noting that the index spent about six months, from last June to December, in a trading range of about 10,500 to 11,000.
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