Monday, February 2, 2009

End of Day 2/2… DOW Theory Update

Nail biter! A mixed market to work off oversold conditions. We sit with our feet dangling over the edge of the abyss, the bottom of that pennant that needs to hold for the bulls to have any chance. It’s their last line of defense prior to triggering a very dangerous technical pattern – the pennant, which in this case is worth 599 points.

Once again the data was just one notch above horrific and that gave the media and everyone a warm enough feeling to have an excuse for a little rally off this morning’s bottom, but we know the media wouldn’t recognize an oversold condition if one bit them in the rear!

On this mixed day, the DOW lost 64 points or .8%, the S&P lost a fraction, the NDX gained 1.3%, and the RUT gained 1.4%. Oddly, the XLF finished on the exact digit it began the day, while BAC gave up 8.8%, holding the index back from the rest of our wonderful financial institutions which managed to fool people for yet another day.

Both GLD and the TNX fulfilled the reversal on those outside hammers I showed, GLD lost 2.7%, and the TNX lost 4.4% - moral of that story is don’t ignore outside hammers, especially when they are right on support or resistance.

The internals matched the indices in that the NYSE was slightly negative but the NDX was slightly positive on both advancers/decliners and volume. Overall market volume was down slightly from last Friday.


Let’s begin the update by looking at where we are with DOW Theory. Of course we have been on a sell signal for quite some time, the theory being that when the Industrials and Transports both make new lows together then you are in a bear market.

There has been some talk lately that we set up a potential non-confirmation when the Transports closed below the November CLOSING lows, but I disputed that because we hadn’t broken the pin lows much less closed beneath them (thus the old low was still in tact – close only counts in hand grenades and nuclear weapons!). Well, today the Transports did manage to not only break the old pin lows but they also closed beneath the pin. Here’s a 3 month chart of the Transports so you can see that we barely did it:

Now then, IF the Industrials were to fail to break their November lows (about 480 points down from here), and then BOTH the transports and industrials subsequently go on to break their January highs, then you would have a fresh DOW theory buy signal. Personally, I think the odds of that are much lower than the Industrials fulfilling a fresh new sell signal by breaking the November lows. We’re a long way from the January highs, and gee, did anyone see the Railroad Freight index today? Down 14.6% yoy. Remember that Charles DOW postulated that the reason this works is that freight traffic is a leading indicator. When shipments begin to fall, then the rest of the market follows. The transports making new lows today should have the bulls concerned, but of course, I didn’t hear mention of it on CNBS.

At any rate, here’s a one month daily of the DOW. That up sloping red line is the bottom of the pennant which is clearly broken and we now have a close beneath it after two intraday tests. Note the fresh sell signal on the daily stochastic and also note that the DOW made a new low beneath its January low (Nov low at 7,449):

Now, you might think that the DOW produced a red hammer there, but let’s look at the DIA to confirm… and we find a doji along with the same fresh sell signal on the stochastic:

Since the DOW broke its most recent low, its P&F chart triggered a sell signal with a nasty new target way the heck down at 7,350. If achieved, that would fulfill another DOW theory sell signal and that’s what I would expect. The DOW and the Transports were the only two indices to trigger P&F breakdowns today, but the others are pretty close:

Here are the Transports. Note the new target… it’s nearly 21% down there:

While we’re looking at daily charts, here’s the SPX. A red doji (shows consolidation or indecision), and a fresh sell signal. The SPX pierced its Pennant bottom (dark red line) and bounced back above:

Finally, let’s look at a 20 day, 30 minute SPX chart. Right now we’re thinking this MAY be wave 5 down we’re looking at here, with wave 1 of 5 beginning on the top left and bottoming in the middle, wave 2 retraced 61.8 of wave 1, and now we’re likely on wave 3 down and may be bouncing on wave 2 of 3. So far we’ve only retraced a little over 23.6 of wave 1. If we retrace 50% we’ll go to 845 or if we retrace 61.8 we’ll be at 852. Of course we could just make a bear flag and continue down. If this is wave 3 of 5, expect much lower prices soon. While we’re here, I want to note that the 10 minute stochastic is overbought but the 30 and 60 minute are mid-range with the 60 minute slow just coming out of oversold:

TLT took a breather today and was up 1.6% but is still well inside its downtrend channel.

All in all a breather while sitting on a line of last resort. This is one of my favorite Eagles songs… Don Henley has tremendous insight, “Call someplace Paradise, kiss it good bye…”

Eagles – The Last Resort: