MARKET FALLS 3% -- MAY NOT BE AN EXACT REPLAY OF 1990-91 PERSIAN GULF WAR
ANOTHER LOOK AT THE NYSE... Back on Wednesday, March 12 (the day before the recent rally started) we did an analysis of NYSE Composite Index with the headline: "Market Reaching Critical Juncture -- IT'S OVERSOLD BUT STILL NEGATIVE". Given the sharp moves since then -- first to the upside and then today to the downside -- we're revisiting that chart to see how much has really changed. Chart 1 shows the same chart we showed then -- with the same trendlines. It shows the NYSE bouncing sharply off the flat trendline drawn along the July-October lows. That bounce came from a short-term oversold condition, but has now produced a short-term overbought condition. It can also be seen that the rally of the past two weeks has retraced two-thirds of the January-March decline, which is where a rally will normally stall. The chart also shows the NYSE starting to encounter resistance along the lows formed during November and December. The NYSE did climb back over its 50-day average, but is now in danger of slipping back below it after today's fall. It's still below the 200-day moving average, which helps determine whether or not it's still in a bear trend. As of now, it still is. And, finally, it's still well below the declining trendline drawn over the August-January peaks. The point of showing the chart is to demonstate that not a lot has changed from two weeks ago. No major change will take place until one of the two converging trendlines has been broken.
Chart 1
A SHORT-TERM LOOK... Chart 2 gives us a better look at the recent rally. Two weeks ago both daily oscillators (the RSI and stochastics) were in oversold territory. They're both now in overbought territory. The slightly rising trendline is drawn under the November/December lows. A broken support line becomes a resistance line. The third arrow shows the NYSE turning back today right at that resistance line. Breadth was negative today by a three-to-one margin. One positive factor was that the day's 3% price decline came on relatively light volume.
Chart 2
DOWNSIDE RETRACEMENTS... The big test for the NYSE now will be how much of the recent bounce it retraces. The next chart gives an hourly breakdown of the last nine days. It shows that the NYSE has bounced about 600 points. The three horizontal lines show Fibonacci retracement levels. A 50% retracement of the recent rally, for example, sits near 4700. A 62% pullback is closer to 4630. We'll be watching those three lines to see if any new support materializes over the next few days.
Chart 3
RE-WRITING HISTORY... I'm in the process of revising my 1991 book "Intermarket Technical Analysis". Coincidentally, I've been working on the 1990-91 Persian Gulf War. Up until Friday, the similarities to the current situation have been obvious. In both instances, the stock market fell with the dollar -- and gold and oil rallied -- in the months leading up to the war. At the actual start of hostilities in both instances, gold and oil tumbled -- while the dollar and stocks soared. I completed that chapter, however, with the warning that, despite the similarities, there could be significant differences in the ultimate outcome. During 1990-91, stocks were in the middle of a secular bull market -- while commodities were in a major decline. Once the crisis was over, stocks resumed their bull trend -- and commodities fell. The situation today is quite different. Commodities are now in a new bull market -- while stocks have entered a secular bear. At the very least, that keeps us from getting too carried away with the recent market euphoria. As Chart 1 shows, nothing really has changed in the big picture. If it does, we'll act accordingly.
