Tuesday, October 27, 2009

Another Bearish Day for Stocks

Today was another bearish day for stocks. The Dow was positive at the end of the day, but that's about it. The Nasdaqs finally gave way and played catch up to the Dow and S&P with accelerated down moves today of well over 1%. NYSE breadth was also negative today with decliners outpacing advancers 1.88 to 1 with 924 more decliners, and total down volume was at 65%. All this while the Dow squeaked out a modest gain. This shows internal weakness and a small group of stocks, mainly in the Dow, holding the market up. This is not healthy. A healthy market has most stocks and sectors rising together.

During the big wave 1 or A down from the 2007 highs into the March 2009 lows, I remember that whenever the Dow closed the day in the positive, and the NYSE closed in the negative, the following day usually resulted in a big selloff. If the market has in fact topped for months/years, and we are in wave 3 or C right now, then I would expect similar behavior. So we'll see if the Dow closing up and the NYSE closing down today results in a big selloff tomorrow in equities. I suspect it will

The daily charts in the Nasdaqs and the Russell 2000 look especially bearish. I wanted to point out how the Russell 2000 appears to be the leader of the decline and is signaling the future of the blue chip S&P and Dow. Take a look at the above charts (click on image to enlarge). At the top row you'll see that the daily Russell 2000 chart made a double top and did not exceed its September high. Then look at the S&P chart and it shows a clear new high. This non-confirmation led to the current top and severe reversal we're in right now. So the Russell gave us a telling sign. Now look at the bottom row and notice the Russell again is leading the S&P lower with two new lows today, while the S&P held those levels. We'll see if the Russell 2000 is establishing itself as the leader of this decline as we watch to see if the S&P follows suit soon on Wednesday. When you look at the 5 wave rally in the dollar which looks to have bottomed, the impulsive looking decline in the major stock indices, the closing divergence in the Dow and NYSE today, and that the Russell 2000 is pointing lower, plus a lot of other technical data, the evidence is strengthening that this decline is of a very large magnitude.

One side note: in order for this decline to maintain itself I think we need an orderly selloff in the beginning with accompanying optimism. I really like the fact that the past week or so the market has started the day off rallying and then reversed sharply by the end of the day, but not with any real panic. This is a great "slow bleed" for the bulls. If the market does a panic selloff at this point, I think too many people will see it as a capitulation and then establish a bottom and perhaps rally in big volume to eventually make another daily high. I don't want to see panic, at least not right now. I want this trend to continue with good earnings, optimism on the declines with people saying "buy the dip" and "buy this stock for the long run", rallies at the open that are reversed, and no panic. That is the "slow bleed" that will kill the bulls and keep this decline on solid ground where eventually the rug WILL be pulled out from under it and we'll start getting some big Dow down 300+ days again.

Remember my Dow/NYSE sell signal in play tomorrow!


Gustavo said...

Hello Todd:

I don't know if you remember when I write here about my opinion what if C trade under 4.09 could be one insight about the begin of the bear market. Today we have many insight, and C was trading only now under this price. I hope it's very good news too!!


Todd S said...

Yes I do, good call Gustavo. The decline is looking real good for the bears, however the market is testing that key trendline now and the bulls will fight with all they have to maintain it so I wouldn't be surprised if we bounce off it in the short term. We'll see.