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Here is my analysis of the Dow and Nasdaq charts:
As you can see from the one year chart, this pullback was the most severe during that time frame...That was one heck of a run in April (as we almost hit all time highs), that left the lower Bollinger Band at very low levels...
It ran about 600 points, and a bit "too far, too fast" at the end of the run, so a pullback was to be expected...The Dow had an average of 2 Billion shares traded daily last week which is quite high as the selloff occured...
Now the big question we ALL have is: IS IT OVER YET?, or is there still more downside to come?
The causes for this retracement are many...
The "Sell in May, and Go Away" market seasonality is here now...And as soon as school lets out for the year we enter the "doldrums of Summer" when the average daily Volume
decreases dramatically...
The Price of Oil is finally having an impact on Companies Earnings, and the pocketbooks of Consumers...
Commodities (Metals) had just had a huge run-up just before the pullback began...They have pulled back considerably at this point...
Interest Rates and Inflation are the biggest factor IMO...The new Fed Chairman announced another quarter point increase in interest rates May 12th, and left the door open to further increases...
The wording of his statement at that Fed Meeting was not what the Street wanted to hear, and there is a slight chance now that they will raise a half a point at their meeting in late June (or another quarter point, or a slight chance of not at all...)...
All eyes are on Inflation numbers for the rest of the year...I believe if the Fed raises a half a point in June, this will be very bad for the Market...
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A closer look at the last two months shows that the Dow has not yet broken down through the support levels of mid-April (the Nasdaq has fared MUCH worse on this point)...
The Dow has held above the support levels and the close set on 4-17-06, and it has also closed below the lower Bollinger Band (BBand) only ONE day during this pullback...(not so with the Nasdaq...see below)...
The lower BBand has turned down the last three sessions, but Friday's doji candlestick that closed inside the lower BBand may be a turn-around signal (but a doji can also be a continuation of the downtrend signal...)
Monday we will know which one it is for sure...Maybe the most we can hope for early next week is a dead-cat bounce...
Remember that Friday was Options Expiration Friday, that comes the third Friday of every month and is associated with Volatility...
The Technical Indicators say: The Parabolic SAR price target to the upside is 11525 while the upper BBand still sits above 11675 so that's the potential upside on this chart, though I find that scenario VERY doubtful...Even a 50% dead-cat bounce would only put it at about 11400 and the hourly chart below says even that level isn't in the cards in the short-term...(11250 is the near term target or a 30% bounce off the lows which is OK and normal)...
The CCI is at very low levels and is trying to turn up here...IF it manages to cross above the -100 line, that will be a buy signal to many...
The RSI didn't go as low as I had hoped it would on this pullback...Usually, heavy buying doesn't come in until the RSI hits 30 or less and it has turned up at 35 at
this point (the Nasdaq RSI hit 25!!!)...It is however trying to turn up here and a small rally Monday will make it look like a buy signal to many...
The ADX is showing the downtrend strengthened, and the DMI's have not as yet made any sign of a reversal...When they start to converge even a little, that will be a good sign...
Stochastics are showing it reached 100% Oversold conditions, and the fast line has crossed up through the slow line, so there is hope that this trend will continue...
The MACD is looking bad here, and the Histogram actually worsened Friday even though it closed up 15 points...Blame that on the Volatility Friday, and the lower wick of the doji (intraday low) it set...
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The hourly chart show a possible double-bottom may have formed Friday...A break above 11200 will confirm it...The 5SMA is about to cross up through the 15SMA and that would be bullish...
The Parabolic SAR and lower BBand sit just under 11100 so that's the potential downside to this chart...The upper BBand is at 11250 so that's the potential upside...
Money Flow almost broke above zero late Friday, and if it does Monday is also bullish sign...OBV held up fairly well, but Accumulation shows little sign of improvement...
The CCI gave a buy signal late Friday and the RSI broke above a level of resistance also...ADX shows the downtrend has lost momentum, and the DMI's are still inconclusive...Stochastics are in the middle, and a break above 50 would be bullish...Turning back down at the 50 line would be bearish...
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The Nasdaq (Technology) has fared much worse during the entire Q1 Reporting Season, and especially during this pullback...On the one year chart, it has broken down through all levels of
support it had this year and is now negative for 2006 by -0.5%, while the Dow is still up 4% and the S&P500 is up 1.5%...
The daily chart shows that it closed below the lower BBand six sessions in a row, and finally closed inside the BBands Friday as it formed a fairly bullish candlestick that day...If it had opened a bit lower, the candlestick would have been a fully encompassing green over red...
The CCI interestingly enough upticked the last 5 sessions as the closing numbers fell hard...It's about to give a buy signal
if it can cross up through the -100 line...
The RSI hit 25 which is almost unheard of and tells me
there are a lot of stocks out there that are at very good buy prices...The ADX shows no signs of turning yet, but it is a lagging indicator for short term moves...When the DMI- starts to head down, that will be a good sign...
The MACD is bad here, but the Histogram actually upticked
slightly Friday...Now we are waiting for the fast line to turn up also...Volume was also unusually heavy last week for the Nasdaq...
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The hourly chart shows it right in the middle of the BBands, but with little room to move in either direction...2215 is the potential upside on this chart...
Money Flow upticked Friday, but the OBV and Accumulation show no improvement...The CCI is fairly neutral at this point, and I'm surprised it's as high as it is as of Friday's close...The RSI breaking above 50 would be a bullish sign...
The ADX show signs of improvement slightly...Stochastics approaching Overbought is not a good sign...When it gets to the upper BBand it will be totally Overbought...This isn't good if you're a Bull...It it breaks below Friday's intraday low, the Bulls will be in a world of hurt...
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Now, it's time to get gutsy with a prediction or two...
First, I will say we are 100% cash right now with no positions, and have been for almost two weeks now...We had a VERY GOOD first four and a half months this year, and I see no reason to do anything that will take away those gains...
I do know how to Sell Short, but it is not one of my favorite plays...We could have made a LOT of money shorting a number of stocks recently, but I've had better things to do with my time...I like it when the Market is in an UPtrend...
I expect a 'dead-cat bounce' and 'short-covering rally' Monday or early next week...The RSI of the Dow and Nasdaq are at levels that usually encourage buying...After that, it's anyone's guess, but the warning is:
If the Dow or Nasdaq break below Friday's intraday lows, and close below them anytime next week, the Bulls are in for more pain...
I am a BULL myself, and will be so until things change enough to change that...This Market is still in an UPtrend, believe it or not...
I would like to see a nice rally next week that pushes the upper BBands UP on the daily charts of the Dow and Nasdaq...Then I will have something interesting to talk about...
Until then, I advise extreme caution...
We have a few stocks in our stable that could still have a good next few months no matter what the overall Market does, and I will be concentrating on them and posting as necessary...
SANM and RBAK are still my two favorites that have held up VERY WELL during this pullback...CPTC is still one of my favorites, and always will be because I believe that someday they will finally get their act together, and the product they offer will take finally take hold in the Electricity Transmission Sector...
Next week should be very interesting, and will determine if this Market is still in a Bull phase, or if the Bear is finally going to take over...
GOOD LUCK TO ALL NEXT WEEK!!!
SANM
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