By Dick Arms RealMoney.com Contributor 9/26/2005 9:30 AM EDT
Hurricane Rita may not have done any damage to Texas yet, but it already has slammed the markets this week. The first three days of the week brought about the start of the decline we have been anticipating. Again, news events seem to be helping markets to fulfill moves that were signaled on a technical basis.
Thursday, as some hope of an amelioration of the pending disaster was sensed by traders, a rally got going. Interestingly, from a technical standpoint, the rally came in just about where it was to be expected. The Dow came down almost exactly to the lows of late August. The Arms Index numbers had become somewhat oversold, and the VIX had gone to 14.39, a level very similar to that touched on the August low.
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The Nasdaq penetrated the late August low three days ago, suggesting a further decline and hinting that the support in the Dow is ephemeral. The Nasdaq also found support Thursday at a level that could be interpreted as the bottom limit of the descending trend. So a short-term upturn could be anticipated.
After the big hit we've taken, it's nice to get some rallying. But I am afraid it will be of little consequence. I have been anticipating a drop ending late in September or early in October. We are not there yet in terms of the cycle, and I do not believe we are there yet in terms of price levels.
Understanding the MACD A number of readers have asked for an explanation of MACD. This abbreviation stands for moving average convergence/divergence. It was developed by Gerald Appel, and it is one of the few indicators I use that I did not invent.
The MACD line is the difference between a 26-day and a 12-day exponential moving average. Superimposed on the MACD line is a nine-day exponential moving average that acts as a trigger. In other words, when they cross over, they suggest either a purchase or a sale.
Notice the effectiveness of the crossovers on the charts that follow. The red line is the MACD, and the blue line is the signal line.
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