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Big picture posture

August 11, 2007
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I don’t normally look at the Dow too heavily, but with all of the talk about global expansion and the industrials outperforming due to their exposure to overseas growth, it’s interesting to consider the Dow in addition to our normal go-to indexes.
Though the breakout to recent highs did breakdown and ultimately “fake out” fairly quickly, there is still a strong and in tact long term uptrend with a trend support line just below us. If that doesn’t hold, the next likely area of support would be 12,750. After the recent craziness and fear as high as I can remember in recent years, is the Dow really likely to fall another 500 points in the coming weeks? Remember, the crowd usually gets it wrong, or so they say. I suppose it’s possible this level will break and the quick drop to 12,750 could happen. After all, it’s really only 4% and would actually finally achieve the 10% correction that so many have longed for. But again that is a strong and healthy long term uptrend in 30 mammoth stocks that don’t just get going or turn on a dime. Even if we are destined to test that area for an “official” correction of 10%, the past two weekly candles are pretty major inverted hammers, showing an inclination to bounce. We shall see.

SPX is also still in good looking long term uptrend, though the breakdown after the fake out of the trading range at the top does seem a bit more severe. The trend line from the mid ’06 lows is pretty much broken. But there is almost surprising support from the old channel resistance line in blue. Also the weekly candle shows an inverted hammer like the Dow. If this area doesn’t hold, the next likely area of major support is 1,380. After that, all the way down to 1,325. The first level would be roughly an 11% correction from the top, the second would be almost 15%.

For a closer look at the SPX, I’m going to be a bit obnoxious and put up a chart with way too many indicators and lines. Basically, I just don’t want to do a third SPX chart. One thing that I think is quite interesting, though I’m no Fibonacci pro, is that the low from last week that provided intraday support again this week is right on the 38.2% Fib retracement line, the first of the most significant retracement levels. The 200 MA is also providing support in addition to the diagonal and horizontal support lines present on the weekly chart. In total, there are 5 support lines of one kind or another, including the fib line, around the current price.
The Market Forecast indicator is actually quite bullish, save for the longer term sentiment indicator, which is heading down with plenty of room to go. But after last week’s cluster, the intermediate term green line has exited the lower reversal zone for the official green light on playing the cluster. To strengthen the bullish argument being given there, the momentum and near term lines are lining up for a nice “Intermediate term confirmation” signal, another of the signals Investools teaches on these indicators. In short, the two shorter term indicators line up to be the wind at the back of the intermediate term line.
In short, I’m expecting a bounce here. But the real test will be when the index tests the bottom side of the old support and recent resistance line at the 1490/1500 area. If that holds as resistance, we’ll likely see some serious sideways choppy action for a while or possibly another leg down and potential beginning of an intermediate term downtrend.

I think I showed VIX with a weekly chart last time, so I’ll just stick to the daily. It’s rocketed only higher and seems very likely to come in some. Even if it is destined to go higher, there needs to be some kind of retest of the new range support. I just can’t imagine the VIX going parabolic without a true market crash happening. Regardless, it is clearly telling us that fear is high right now. It’s also telling us to be on our toes for a peak, as once it is high and then turns, THAT is the time to buy. So my take is that this is very close to being a bullish indicator right now. One point of interest from this past week is Wednesday’s action. Though the SPX had a big strong up day, the VIX did not have an impressive down day and actually couldn’t break below the recent support/old resistance level at the 20 area. I took this at the time to mean that the up day in the SPX was not to be trusted because people were still buying puts heavily. But really, just look at that Doji star hanging up there. Can it really go higher in the next few days? Of course it can. But is it likely? I doubt it.

The Russell 2000 small caps index has shown much relative weakness in recent weeks, but this week was quit strong. With what we could call a bullish engulfing weekly candle, it seems to not want to give up these support lines, both diagonal and horizontal.
With all the talk about how strong the Big Caps are, could this be the time to get into small caps? The long term view seems to indicate so.

Again, I’ll leave the Nasdaq up to you. But here’s my thinking. The Dow still shows the most relative strength. The SPX, with many more components to it, is still strong in a long term sense, but the short term is looking a lot more shaky. If the Russell and the small caps bounce from here, the small caps may finally wake up and actually provide a bit of support to this market. I would think that would only help the SPX regain its composure next to the Dow.
Take a look at the Nasdaq versus the Nasdaq 100(NDX). The NDX looks stronger than the composite as a whole, which makes sense considering the NDX is the 100 big boys. If the smaller guys, many of which are surely in the Russell 2000 can get it together, perhaps the Nasdaq composite can work its way through the congestion of “overhead supply” it has to deal with.

Any comments? I dare you.

Bueller?

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4 Comments leave one →
  1. Jim McCabe permalink
    August 12, 2007 3:41 am

    Every item discussed here shows your bullish bias as you show disbelief at the prospect of further decline in all instances. Can the VIX go higher? Can the market crash down through support? We are in a correction!! Yes and YES are the answers and as you know my assumption until the market proves otherwise. Why not be ready to play the break of support instead of rationalizing why it won’t? Which pays better… a support break or a stabalization of the market? There is plenty of time to act IF the market stabalizes, a break of support gives precious little time for preparation.

    On the DJIA….
    “But again that is a strong and healthy long term uptrend in 30 mammoth stocks that don’t just get going or turn on a dime”

    Look at history… these stocks turn on a dime more often than not. This is why most people lose money trying to trade the market.

  2. Jim McCabe permalink
    August 12, 2007 4:09 am

    On the VIX….

    “Even if it is destined to go higher, there needs to be some kind of retest of the new range support”

    Didn’t it already test 20 and BLAST higher? Why does it NEED to retest? It is the VIX, it goes bonkers when the stuff hits the fan. That is its job.

    It is certainly a historical anomoly to have the VIX spiking up like that and have the market NOT breaking support. The move in late July was totally normal with the SPX breaking support while the $VIX spiked out to new highs. But the action Thursday and Friday in the VIX, as far as I can tell, has no historical precedence (at least in the data we have available). Historially only a breaking of support (and plunge) in the SPX accompanies such a move in the VIX.

    Perhaps it is just part of the re-pricing of risk going on. But I guess in a bulls eyes it shows a historic buying opportunity since someone is expecting a crash 🙂

    Have you seen any mention of this anomoly anywhere? Certainly someone else must have noticed?

  3. Matthew Curran permalink
    August 12, 2007 6:07 pm

    Perhaps I have something of a bullish bias, but I don’t believe I’m screaming bullish, bullish, bullish. The long term trends are still up. The intermediate term is sideways, the short term is down and coming in to meet the longer term lines. So I’d expect the longer term momentum to resume it’s influence. That’s all. I did give support lines that may break and the next likely level down, so I certainly consider the real possibility of that happening. Notice the mention of the quick bounce and then bounce down from recent resistance on the SPX.
    Of course the market can break lower and the VIX can surge higher! But the whole principle behind the “When the VIX is high, time to buy” is that the crowd usually gets it wrong. Much of the media is screaming now that the sky is falling. Of course we’ll follow the charts and see what happens at the significant levels, but this is the type of situation in which the general public is bewildered and scared and the “smart money” (whoever that may be, and yes I know that THEY have been getting crushed lately) starts buying the weakness.
    The VIX being high on Friday while there was no breakdown in the SPX is quite noteworthy. I don’t know about the history of this. Perhaps big insitutions are buying tons of puts to protect themselves from more expected carnage. As I said before, we’ll see.
    But again, Long term trends up, intermediate sideways, short term down. Market Forecast is bullish if a bit dampened by a bearish market sentiment, and the VIX is VERY high. With an intermediate time frame in mind, I’d think this still spells Neutral.

  4. Jim McCabe permalink
    August 12, 2007 7:48 pm

    It’s the questions designed to write off the possibility of a break of support right here I was talking about… all the bullish arguements get lots of supports while the bearish potential is written off with ease.

    “is the Dow really likely to fall another 500 points in the coming weeks?”

    “just look at that Doji star hanging up there. Can it really go higher in the next few days? Of course it can. But is it likely? I doubt it.”

    “the real test will be when the index tests the bottom side of the old support and recent resistance line at the 1490/1500 area”

    We already tested that 1490/1500 area and failed. Now we are back testing the low. This has to hold before a test of that area and sideways trend can develop or bullish trend resume.

    Until said bounce develops which could obviously be as early as Monday morning, writing off the potential of a support break as unlikely can only leave one with the deer in headlights look if it does come to pass. The “real” test is the one we are currently in which is the test of the lows. The short term trend is down and we are at the lows. Unless we know the future we should be prepared for either a bounce or a break. Which we think is more likely is irrelevant.

    I understand your post is for intermedaite term posture but that does not mean movement that can change the neutral posture is unlikely. In order to be ready for it and profit from it it must be given its due. Just ask Tim Knight 🙂

    Still nothing on the VIX anomoly. Guess no one can tell what it means. Pure fear I guess.

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