 | Technical Summary: | |
Up Trend Broken
The market might find a bottom in the short term, but there is a fair amount of intermediate term damage to repair.
Chart Courtesy of StockCharts.com
Not only are the major indexes testing key support at this moment, but the market's overall health has seen better times.
A look at the NYSE advance decline line (NYAD, above) shows several key points.
First, as we noted here several weeks ago, when the Dow Jones Industrial average closed above 14,000, the NYSE a-d line did not make a new high.
That was a classic technical divergence, which time has proven, clearly predicted that trouble was on the way.
Second, looking at the a-d line's current stance, a steep downsloping trend, the indicator is telling us that the market is still dizzy, and that any recovery could take several days, and perhaps weeks.
Weakness in the advance decline line, when the major indexes make new highs has an excellent record of predicting trouble for the market, as in 1987, 1990, 1994, and 1999, just before the dot-com boom imploded.
In other words, several significant market declines were predicted correctly, in the last 20 years, by failures of the NYSE advance decline line to make new highs along with the Dow or other major indexes.
For now, the best strategy is to stick with what's working, and give this market time to work out its own kinks, without taking too much of our money away.
Think of alternatives to stocks, such as bonds and the dollar, which are still offering a unique trading opportunity, shorting bonds, and being long the dollar.
Otherwise, be patient. From a longer term stand point, based on historical trends, this should be a positive year for stocks, given the fact that it's the third year of the Presidential Cycle, which calls for rallies in the third and fourth years of a presidency.
Our long term forecast remains upbeat, unless the major indexes fall convincingly below their 200 day moving averages.
What To Do Now
Active trading now requires a higher burden of proof before pulling the trigger, meaning that unless there is a huge compelling reason to buy something, it's better to wait.
Keep a lid on emotion, and stick to your trading rules.
Consider taking some profits where it makes sense, and consider tightening stops where appropriate. Use our individual sections for guidance.
Selectivity remains the key to success. Look for strength, either on a continued basis, or in turn around areas, such as the semiconductors.
Visit all our individual sections, both our ETF and individual stock picks daily for new ideas, and changes to open positions.
Be very methodical about monitoring portfolios, adhering to trading rules, and ratcheting up sell stops is clearly still here.
Second guessing decisions, and hoping that things will turn out o.k. in the long haul, is the recipe for disaster at a time like this in the market.
Check all our sections daily. See tech, biotech, Fallen Angels, and timing systems for the latest adjustments. Our ETF trading systems for energy, Spyders, Small Caps, and technology have also been updated.
Chart Courtesy of StockCharts.com
Chart Courtesy of StockCharts.com
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| Sentiment Summary: | | Is The Bearishness Finally Overdone?
We might be setting up for a short term bounce, given the amount of bearish sentiment that has built up. If the bounce comes, the key will be to see how fast the put/call ratios fall back.
A quick fade in the fear would likely be a sign that another wave of selling is on the way.
The CBOE Put/Call ratio closed at 1.38. A consistent string of low readings can be a sign of excessive optimism and often signals a top in the markets. Readings below 0.5 are of concern, but not as serious as readings below 0.40. Readings above 1.0 are bullish. The numbers cited here are meant to be evaluated on a closing basis.
The CBOE P/C ratio for indexes checked in at 2.28. Numbers above 2.0 as the market sells off, often lead to rallies. Readings below 0.9 suggest too much bullish sentiment, just as readings above 2 are usually required to mark major bottoms.
The VIX and VXN had readings of 20.74 and 19.50. A fall near or below 20 on VIX and 30-40 on VXN is considered negative, a fact that is usually confirmed when the volatility indexes begin to rise. Readings above 40 and 50, respectively, are often signs that a bottom may be close to developing.
NYSE specialists are still sending worrisome signals. This group of savvy investors remained aggressive sellers on 7-13, after pausing slightly on the week on 7-6.
This makes it five out of the last six weeks, of overwhelming selling. The only week of some buying in the last four reported was the week of 6-15, with the week of 7-6 barely making it to the plus column, making it negligible for all practical purposes. This has been a period of significant volatility for the market, despite the highly hyped Dow 14,000 milestone being taken out.
The combination of high put option buying and negative action from NYSE insiders has in the past been a prelude to trouble for the markets.
Market Vane's Bullish Consensus was at 64% on July 27, but is still above the 40% that often marks meaningful market bottoms. The UBS sentiment index fell to 89 in June from 95 in May and is starting to increase its distance from the reading of 103, registered in January.
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