Financial Sense   Home  l  Market Monitor  l  Market WrapUp  l  Storm Watch  l  About Us  l  Contact Us

NECKLINES AND SUPPORT LEVELS ARE UPON US

Let me start this article, coming on exactly like a technical analyst. The US market is at an important fork in the road whereby we may be at a major turning point, or we could have more of the same in the weeks ahead. What is important is that in the charts of many individual stocks and indices we are at a location where this should be known soon enough to make intelligent intermediate term tactical trading and investing decisions. If the answer is that we will get more of the same swing trading environment, we will see it in the action of stocks and indices.

For example, the long term trend has been for the market to respect support levels to the point where they were sometimes broken by a marginal amount; but shortly afterward the former support levels were rocketed past by a sharp and decisive rally. Such rallies have left the bearish grabbing at air, or worse. It now seems as if this behavior is continuing in some of the most popular household Nasdaq names. A poster child for this behavior occurred this week in the action of Apple Computer. The stock broke support in the high 50s and headed consistently downward until a bullish Barron’s cover story and well-perceived quarterly earnings whipped the bears.

Similar action was seen today in Motorola where long term support has decisively held on the heals of good earnings news.

But it still isn’t entirely clearness and light in the large cap tech sector. Former favorite Yahoo has finally broken a downward sloping neck head and shoulders distribution pattern that has lasted a full two years.

Household names have exhibited some public support for their stocks. In many cases, Wall Street has been less charitable to the less popular names evidenced by Polaris Industries, Inc. where the trend is clearly down.

Indices may prove more relevant to consider the state of today’s market than individual stocks. The chart below shows the Retail ETF. A two year old trendline has been broken. Or has it? As this is being written, the retail holders ETF is right up against a 2 year old trendline. It was previously support. Will it now be shown to be resistance?

There is similar behavior of the Russell 2000 small cap index. The wedge pattern (with throw over), has apparently broken support, and now it has its head up against resistance.

There is similar behavior and a similar predicament with respect to the S&P mid-cap ETF as well as a host of other stock indices.

The Nasdaq 100 is always capable of a massive rally and it doesn’t take much to incite such an event. But Chairman Bernanke will have to say a lot of optimistic things to get the Nasdaq 100 back to its trendline. Odds would seem to favor a continuation of the downtrend. In my humble opinion, based on valuations, it is reckless to invest in the majority of companies making up the Nasdaq 100. And now there is confirmation with the technical behavior of this index.

Whether or not we get that rip-roaring Nasdaq rally will likely be telegraphed by the semiconductor index. Note from the chart below, the behavior of the Semiconductor IShares. The 55 level is an important technical level, and as of now, the ETF sits at 53.85.

A Word About Sentiment

What are illustrated above are key technical patterns and support and resistance levels at key levels where they are now being tested. At the moment, investor sentiment has turned from extremely bullish to rather bearish. While contrary opinion can be used to suggest a rally is due, that would only hold true if the swing trading characteristic market were to continue. If investor sentiment could always be used to as a contrary indicator, then that would be the “holy grail” of technical analysis. Since we know there are no holy grails, it must be true that there are times when the crowd is right. Whether or not this is one of those times, in my view will be confirmed by the behavior of the key stocks and charts that are now at key technical positions. If the crowd is always wrong, then there would be no one left to pay excessive prices to contrarians when they sell their shares!

The market is now at an important technical position.

Today’s Market

Since we are considering important necklines, we should consider the transports as shown in the chart of the Dow Transport ETF, below. The transport ETF closed today at 80.67, down more than 4%, just a hair’s breath from its critical support level.

Stocks reversed yesterday’s Bernanke rally, apparently since he didn’t say anything else new. With regard to news, suddenly it seems as if there is precious little else except for Fed-speak that makes stocks rally. Good earnings news such as what was released by Apple and Motorola seem to have their effect on only themselves with little effect on the general market. Now with Google apparently saying nice things, we’ll see what that does for the market tomorrow. Mid and small caps were hit especially hard today. Advancers led decliners by a 2 to 1 margin on the NYSE, and a 3 to 1 margin in the Nasdaq. Not a good sign.

Also peculiar is the action in energy stocks, many of which have seen their tops about 6 months ago. Typical is Canadian Natural Resources (CNQ).

If there’s always a Bull Market somewhere, then there is something in the stock market to which the word “always” applies. Something to think about on this warm summer evening.

Martin Goldberg

Copyright © 2006 All rights reserved. Martin F. Goldberg, MS, P.E. Market Analyst Expert Page Commentary Archive Email

Home  l  Broadcast  l  Market Monitor  l  Storm Watch  l  Sitemap  l  About Us  l  Contact Us