Today's Market WrapUp 02.19.2009 Mon Tue Wed Thu Fri Goldberg Archive
Market Teetering on the Brink
BY MARTIN
GOLDBERG, CMT
Since late November the stock market appears to have been consolidating its losses. The important question (to be answered soon) is whether the action since late November is merely a consolidation before the long term downtrend continues, or if long term support at S&P 800 will hold. Transports are relatively weak, and technology is relatively strong. One technical pattern that looks compelling in today's market is the cup-with-handle which is forming in most of the major US indexes. This is normally a bullish pattern, but in this case the pattern is bearish because it appears on the transposed chart (where up is down). Transposing the chart makes the visualization of the pattern simpler since most analysts typically look for bullish patterns. As shown in the 2 year chart below, the cup-with-handle consists of a long term consolidation (cup) followed by a move in the direction of the trend ("up" on the chart) followed by a short term consolidation of the "gains" followed finally by a break into new ground (breakout). There has likely been pattern completion in the Dow Transports index as shown in the chart below. If not, what is labeled as a breakout would have to be refuted as a false move within a matter of days.
All of the major indexes are showing a similar pattern; however the breakout thus far is marginal at best. Here is the 2 year chart of the S&P 500 clearly showing the importance of the decisive break of the 800 level as long term support. What we are seeing in the cup is a move in the direction of the trend (down, visually up on the rotated chart). Since late November of 2008, there was a consolidation of the move, and as of the moment, the breakout, which would define the action since November as a continuation pattern, is still in question.
If the market is going to be led out of this mess and maintain 800 as support, it will probably be on the shoulders of the Nasdaq 100. Among the strongest and most liquid stocks in this group is Amazon.com. Here is the 2 year chart appropriately oriented (up is up). Amazon has a relative strength of 95 and now sits between converging 50 and 200 day moving averages.
While technically strong, it would probably take a strong market to propel the strongest stocks such as Amazon upward and it would be too risky to buy a stock like this in a bad market .
How important is 800 as support? Very important. When the market was slammed down to about 800 on Monday, following the close, CNBC trotted out none other than Alan Greenspan, the Maestro, to declare among other things that stocks are "cheap." No surprise here in that the Maestro has been the number one go-to guy for manipulating public opinion on financial markets. But what is most disconcerting about the market action following his comments is the oversold market seems to have not been able to rally. In fact today, just the 2nd day after his comments, the market is selling off into new low ground. This would seem to be significant. When the Maestro cannot support a long term support level, then who can?
The market is now closing with the S&P at 780, which is about 2.5% lower than the "breakout" point of the handle in the S&P 500 chart above. If 3% is taken as a "decisive" break of support at 800, then the S&P sits less than 0.5% above what can be considered, a failure of support.
Do you believe in miracles?
Today's Market
The Dow broke into multi-year lows today. How can this be just two days after the Maestro declared stocks "cheap"? The problem is one of credibility. Mr. Greenspan, once the most respected individual on Wall Street has lost his. In addition, Wall Street, the nebulous reason for the US' prosperity since the Reagan years, has gone from perceived hero to actual demon.
The important question for most investors is whether to be in cash or gold. The problem with gold as an entry point is that it is very much overbought after having surged off of practically no consolidation from its autumn of 2008 bottom. From my perspective, as for adding to existing positions, its time to be patient. And while the fundamental picture appears bullish to me, its difficult to dismiss the magnitude, intensity, and duration of the summer/fall sell off in gold and gold stocks as just a shakeout.
Martin Goldberg
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