It has been three weeks since I gave you an update on the Super Chart, and with all the action in the markets in the past 18 trading days, I think it's time we take a look.
First let's look at the S&P Super Chart cash index chart.
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First off, note that we are still under the Super Chart Keyline. That tells us we are still in a bear market. The current reading is 1,416 for the Keyline, a good 50 points above the current trading. However, we are above the key support I reported to you three weeks ago at 1,325. The bears have tried valiantly to break this support. But, they didn't. That's good news.
Now, I want to call your attention to a pink line on the chart just above the Keyline. This is what I call my centerline. It is a proxy for the combining of several moving averages adjusted with a regression factor. Sounds complicated, but it is simply to tell me if the momentum of the Keyline is shifting. The news here is a bit discomforting, since the line has clearly trended down for the last four to five weeks. A shift in slope direction has not happened since late 2003 when the last bull move began. That is bad news.
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Does this development change anything I have said in the past two to three months? No. But it is reason for watching the S&P key support line much more closely. And it is cause for us to give greater attention to the need to cross up the first overhead resistance line that I have drawn in at 1,390. We will need to cross up this line and hold the cross up for at least two weeks to allow us to ignore the pink line down slope warning.
In addition, I will be watching closely to see if the pink line crosses down the Keyline itself without crossing above the first overhead resistance. That would be a signal to retrench a bit on our commitment of 50 percent of funds to the market several weeks ago. That would be bad news. For now, that is not the signal. I will let you know if that caution needs to be exercised.
Let's now take a look at the Dow Industrials chart and see how it stacks up on the Super Chart.
The good news is that it remains above the neckline at 12,100 that we talked about three weeks ago. On the recent pullback last week, the prices did not test the neckline of the head and shoulders formation. That is very good news.
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The bad news is that what is called the "headline" has not been crossed up either. The headline is defined as the down line from the top of the head of the head and shoulders formation down past the highest pullback before the neckline was formed. Look at the white line I have marked as the headline and you will see that prices have pulled up to the bottom side of this down line, but not, crossed up that headline. Again, a bit of discomforting news.
How important is the cross up? It is the very key to 90 percent of the destructions that occur with the head and shoulders formations. That is a very high percentage requirement. In other words, if we don't break this line (currently at about the same place as the Keyline, Dow 12,633), we are potentially still in the running to break the neckline down again and test the lows set in January. That's bad news.
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I am going to throw in one more chart for consideration today: the Dow Transportation chart (called the Rails in the old days). This chart is the second of two charts that the master of all newsletter writers, Richard Russell, watches like a hawk. I follow it closely as well. I was of his generation of writers and always felt that his faith in this combination of charts was right on the mark.
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Mr. Russell says that, according to the Dow Theory, both the Dow Industrial and Dow Transportation charts need to set new lows to confirm a bear market. So, I am watching the lows set in January for both, the Industrials at 11,634 intraday and the Transportation at 4,032. (Mr. Russell uses the Tuesday close of that week of Jan. 25, at 4,140, but I like to use the lowest recorded that week).
Both the Industrials and Transportations are about 900 points above their January lows. That is good news, very good news. Now here is the bad news. The Transportations chart has also carved out a huge down head and shoulders formation. I have circled the left shoulder, the head area, and the right shoulder for you to see clearly. The neckline is currently at 4,145. This is potentially very bad news for us.
The important thing with this formation is that the right shoulder has now pulled up to the same height as the left shoulder, as is the case in most such formations. (I always find the symmetry of these formations amazing!) The problem for us is that prices must cross above the height of the shoulders at the 5,000 level and hold above that cross up for at least two weeks. This is the only way this formation will be destroyed. That is bad news because that kind of cross up is tough to come by.
I know it sounds simple enough, since we are so close, but folks, until it happens we are in jeopardy! The bears are likely aware of this formation just like me, and they will do all they can to stop this cross up from occurring. They know that the destruction of the bearish formation in the Transportations chart will lend huge support to the bull's case and may even spark a number of well-heeled bulls currently on the sidelines to put an oar or two in the water.
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What do I think will happen? Well, I never make rock solid predictions, as you know, but I am of the opinion that it is a seven or eight on a scale of one to 10 that the Transportations chart will break to the upside and destroy the potential down forecast of its formation. And I expect that this might happen in the next month, maybe even sooner, since we are so close to the 5,000 mark. Remember, a cross up must hold at least two weeks to be valid.
If this cross up does occur, then watch the Industrials to cross up its down headline and the S&P to crack above its first overhead resistance, too. All of that would be really good news if it occurs.
But, to finally lay this bear move to rest, we will still need to cross up the Super Chart Keyline and hold above for six consecutive weeks. Until that occurs, this is still a bear market.
Well, that is the technical look for this week. I urge you to be alert to the important price levels that you need to watch on the three charts.
S&P: On the downside, the S&P cash index must hold the key support at 1,325, then below that at 1,260 if the key support fails. To the upside, a cross and close above 1,390 will be very important and above that the Keyline, currently at 1,416. Of course the Keyline price changes as the line moves each week, so I will keep you advised of that price as we go.
Dow Industrials: The Dow Industrials support at the neckline 12,100 is crucial on the downside. On the upside, we need a cross up the down headline at about the 12,630 area, which is where its Keyline currently is also.
Dow Transportations: For the Dow Transportation chart, watch the 4,140 (Russell's number – mine is 4,032) on the downside and 5,000 on the upside. A break above 5,000 that holds for two weeks may be the beginning of the end for the bears. And remember, these numbers are on the weekly charts.
That's a wrap for this week. Hope you found some value in this exercise. I do believe it gives you a very good road map to follow as this market unfolds its mystery to us.
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Do hope your investment week is a good one. In the meantime, you keep in touch. I do! See you next week.
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