Well, here we are nearly 10 days post-Bear Stearns, and the markets are still very tenuous. We have yet to break decisively above major resistance on the Dow Industrials or the S&P 500, according to my Super Chart Keylines. Granted, we have broken above what is called the near-term resistance, but the major resistance levels are still higher on both charts. We are, however, closer to resistance levels on the Dow than the S&P.
We have to ask what the charts are telling us at this point in order to get some clearer sense of what to expect and do next. To help me in that regard, I am including the Super Charts for both the Dow and the S&P to illustrate my conclusions about this crucial point in the stock market's unfolding saga.
First, let's look at the weekly S&P 500 cash index Super Chart.
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You will note, of course, that we are still well below the Super Chart Keyline, which currently stands at about 1415. That said, we are still in a bear market as far as this chart is concerned. However, the important action on this chart is seen in two places.
First, the Key Support Line was clearly crossed down during the week of March 7. Typically, I would expect that this very important down action would have been followed by several weeks of further slightly down or sideways action and then, I would expect a pullback to the Key Support Line to test it as the new resistance.
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However, due to the Fed's very decisive action in the Bear Stearns matter, there was a sharp move back to the Key Support Line immediately. This is a very unusual development, indicating that the bears had, for the first time in some months, not called the shots. Even more disturbing to the bears is the fact that currently the closing price on this week's chart is above the Key Support Line.
I don't often see a development such as this. If such a cross-up does happen, it is usually after a period of four to six weeks at the earliest, not early in the second week. However, while this is a positive move for the bulls and a worrisome one for the bears, the bears are still in the cat-bird seat because we obviously remain well below the Super Chart Keyline at 1415 — still well into bear territory.
The second important part of this Super Chart is the section at the bottom of the chart. This section is called the "stochastic" portion of the chart and shows the general "momentum" of the move seen in the price portion of the chart above it. The red line is the slow stochastic line and the yellow is the faster. Generally, as long as the yellow is below the red, the overall momentum is down, which confirms the downtrend of the price chart above it.
However, the major activity on the stochastic portion of the Super Chart is now occurring below the 30 level, indicating that the downward momentum is clearly beginning to run out of steam. This is an important indication that the bears are in much more trouble at the moment than the Keyline might indicate. If the bears plan to remain in control, they need the momentum on their side. Clearly, that is not the case right now.
And when we do get a cross above the slow red stochastic line by the faster yellow stochastic line, in my estimation, we would have a signal that the end of the major bear move was at hand and it is time to begin to do some major buying for the next bull move. We are not there yet, but it can be seen that we are definitely building a bottom in the stock market here and need to be alert.
I would say that the S&P chart is saying that 85 percent of the bear move appears to be over at this point. I would estimate from the picture the chart is showing that we have at least several months or more before we try to actually cross above the Keyline, but I am closely watching for the early buy signal the stochastic crossing event may offer.
So much for the S&P 500 cash index, let's look at the weekly Dow Industrials chart.
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You will recall from my first column in March (see my archive at MoneyNews.com if you need to review that column) that I showed you a substantial down "head and shoulders" formation that had set up on the Dow Industrials. At the time, we had not seen the key action of breaking down through the "neckline" of the formation to confirm its potential to take us to as low as the Dow 10,100, the eventual target indicated if we did cross down the neckline.
But shortly after my early March column, just like the S&P, the Dow did cross down its key neckline support during the week of March 7. I was impressed that both charts broke support at the same time, even though I mentioned at the time that the S&P was not supporting the Dow's formation with its own "head and shoulders" formation and that this non-support did reduce the overall impact of the Dow formation a bit.
But, like the S&P, the Dow has also reversed its down move because of the Fed action and not only crossed back up through the "neckline" — a very unusual move so quickly after its initial breakdown — but it is almost pulled back up to the all important Super Chart Keyline at Dow 12,592.
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Now, remember, I have told you I do not call my Major Market Turnaround (MMT) from the Dow, as the Dow crossovers tend to be much less dependable as definitive signals. This is due to the limited number of stocks represented (just 30) and the fact that big money will use the Dow as a trading vehicle day-to-day while it may at the same time avoid the broader market (the S&P stocks) until it is solidly convinced that there is a confirmed trend underway.
Anyway, the fact that we have pulled back up to the Dow Keyline at the moment and have also crossed back up the "neckline" again tells us that the bears have a lot to worry about at this point. Even the lower part of the chart, the stochastic, is strongly supporting the S&P's stochastic condition, showing a clear slowing momentum condition. I would not want to be a bear with a heavy short position just now.
So, where are we with all this? Well, clearly the bulls are gathering their forces and handing the bears some defeats in here. The sharp reversal of the cross-down of the major supports on both the S&P and the Dow plus the slowing momentum of the stochastic says that the bears are continuing to lose control here. But, until the S&P Keyline is crossed and closes for six consecutive weeks above the Keyline, we do not have a Major Market Turnaround.
Be assured that when the fast yellow stochastic crosses up the slow red on both the S&P and Dow, I will let you know at once. This will be the signal to begin using cash to buy some of the more bargain-priced large-cap stocks, as I said earlier. They will be the first to feel the long-term benefits of the Major Market Turnaround.
In any case, there is progress toward a bottom being built in the major indexes and clear signs that the bears are in a lot of trouble. True, we are not there yet, but I would guess that two to three months more and decisive bull moves will begin to unfold. We shall see.
Well, that‘s my latest chart updates. It surely has been an event-filled seven to eight months, and the next two to three months promise to be packed with just as much action. So, stay tuned!
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Do hope your coming investment week is a good one. In the meantime, you keep in touch. I do! See you next week.
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