Thursday, April 28th, 2005
Stock Market
While some of our technical indicators have edged towards buy signals this week, the price charts of the major indices remain in downtrends. That is enough to keep us bearish -- just as it did when the averages were fooling around at much higher levels in early April.
There are three separate resistance areas on the chart of $SPX (Figure 1). First is the horizontal line connecting the January and March bottoms. Furthermore, the oversold rally that we had last week peaked at that same level. For $SPX, that's the 1165 level, while for $OEX it's 555, and for the Dow ($DJX), it's 10,400. That's just the first level of resistance. Next is the downtrend line that is now defining the emerging bear market. It began in March and the line (see chart) is at about 1170, basis $SPX, at the current time. Above there is perhaps the most important resistance level -- the 50-day moving average. As we've explained before, many institutional traders are "out" of the market when it's below the 50-day moving average. So, for a truly bullish move to get started, it needs to climb above that average. This 50-day average contained the advance in early April and was thus an excellent bearish guide at that time. Right now, it is well above current levels -- at about 1185, basis $SPX. It would be unreasonable to wait until 1185 to turn bullish. So, we would cover shorts and go long for at least a trade if $SPX closes above 1165. One final point about this important level: everyone seems to be watching it -- especially since it has proven to be resistance again this week, so any move through it is likely to gather steam quickly. At the present time, though, the market is quite weak, and so discussions of a move above 1165 are probably moot.
The equity-only put-call ratios have tried to paint a more bullish picture, but in the final analysis, they remain on sell signals. The standard ratio (Figure 2) is still rising and thus it's still on a sell signal. The weighted chart (Figure 3) is sort of moving sideways right now, and our computer projects this will be a buy signal, but given the nasty nature of this market, we'd want a clear-cut move downward before actually declaring a buy signal.
Market breadth has improved from its worst levels earlier this month. That is positive. In fact, each new market low that is accompanied by less negative breadth readings is a positive divergence. There is an old saying in the stock market that oversold conditions only work as buy signals in a bull market. Therefore, considering that we've seen oversold breadth conditions that are not working in this market, it's further evidence that we are not in a bull market any longer.
Finally, there is volatility. $VIX gave a buy when it formed a spike peak at 18 and then collapsed below 15. Right now, it's between those levels, which technically leaves it on a buy, but any move above 18 would negate that.
In summary, we remain bearish. Even though some of the other indicators are somewhat bullish, we are going to need to see prices overcome at least one resistance level (say, 1165 on $SPX) in order for us to give any credence to the indicators that are bullish.
About Larry McMillan
