MARKET REACHING CRITICAL JUNCTURE -- IT'S OVERSOLD BUT STILL NEGATIVE
NYSE INDEX TESING BOTTOM OF POSSIBLE DESCENDING TRIANGLE... Of all the price indexes that track the New York Stock Exchange, the one we prefer at MurphyMorris Money Management is the NYSE Composite Index. That's mainly due to the fact that it includes all stocks traded on the big board (versus only 30 in the Dow and 500 in the S&P) and therefore gives the truest picture of how that market is faring. That's why we chose the NYSE Index today to try give a more comprehensive picture of the current state of the stock market. Unfortunately, the picture isn't all that encouraging. Let's start with the daily chart. Chart 1 shows that the NYSE has dropped to the two previous lows hit during October and July. That can be both good and bad. It may be good in the sense that the index is in a potential support area from which a technical rebound could develop. It's bad because a break under those previous lows would represent a serious chart breakdown. No matter what it does over the short run, what worries us most about the chart is that it resembles a "descending triangle". That pattern is formed by a declining trendline drawn over the August/January highs -- and a flat line drawn under the July/October lows. A descending triangle is normally a bearish pattern. That doesn't rule out the possibility for a short-term rally; but it does suggest that even a rally would just be postponing the inevitable -- a move to now lows. To disrupt that pattern, the NYSE would have to break the upper trendine. The odds for that happening don't look very encouraging.
Chart 1
WEEKLY MACD JUST TURNED BEARISH... We always like to look to the weekly chart to help clarify the major trend of any market. The same "descending triangle" can be seen. Notice, however, that the weekly MACD lines just turned negative four weeks ago. Nothing serious can happen on the upside until those lines turn positive. The red boxes show the MACD lines in negative mode -- while the green box in positive mode. The recent move into red territory reverses the buy signal given last October. The 14 week RSI line (along the top) is still dropping and hasn't yet moved into seriously oversold territory under 30. The red arrows on the RSI chart show that it remains in bear market territory under 50. The rally attempts during the fourth quarter failed at that resistance line. Right now, this chart looks more bearish than bullish to us.
Chart 2
MONTHLY TREND STILL DOWN... Last July, the NYSE broke a "neckline" drawn under the lows of 1998 and 2001. The fourth quarter rally late last year failed right at the "neckline" which has now become a resistance barrier. Until that resistance line is broken, odds still favor the downside. The monthly MACD lines have been red (in negative mode) since 1999. The bear market won't be over as long as those two lines stay negative.
Chart 3
SECULAR BULL MARKET IS OVER... In case you hear on TV that the market isn't expensive anymore, just take a look at this 20-year chart of the NYSE Index. At the start of year 2002, the NYSE broke the rising support line that started in 1982. We're using a log scale here which is better for longer-term work. That means the "secular" bull market has ended. We're now in a "secular" bear market. Keep that in mind next time you hear that things will be ok once the Iraq war is over. The market's in for some tough going over the next few years.
Chart 4
