NASDAQ HITS NEW LOW FOR THE YEAR -- THE S&P 500 NEARS TEST OF ITS MAY LOW -- CASH IS KING
NASDAQ BREAKS MAY LOW ... The Nasdaq Composite Index broke its May low and fell to the lowest level in nine months. That carries bad news not just for the technology sector that dominates the Nasdaq market, but the rest of the market as well. That's because the Nasdaq usually acts as a leading indicator for the overall market. The Nasdaq/S&P 500 ratio at the bottom of Chart 1 has also fallen to a new 2004 low. Relative weakness by the Nasdaq market usually has a depressing effect on the Dow and the S&P 500. Chart 2 shows the S&P closing at the lowest level in two months and bearing down on its May low. [The fact that the S&P has fallen under its March low rules out the possibility of a head and shoulders bottom that I referred to at midweek. The same is true for the Dow which ended back under 10,000 which also broke its March low]. Breadth figures have turned decidedly negative with decliners beating advancers by a two-to-one margin. There are also more new 52-week lows than highs on both the Nasdaq and the big board. Although Friday's volume was low, the volume for the entire week was up which is a bad sign since it coincided with falling prices. By week's end, everything was falling. Energy, utilities, and REITS - which had been holding up recently - saw profit-taking. A rally in the dollar pushed gold under $400, which hurt gold stocks. Global markets weakened. Bonds continued to benefit from safe haven buying. Cash has become king.
Chart 1
Chart 2
Chart 3
LONGER TERM VIEW OF THE NASDAQ ... The Nasdaq rally stopped near its early 2002 peak around 2100 (which we identified at the time as a major resistance barrier). The 14-week RSI was also in major overbought territory over 70. This week's downside break by the Nasdaq raised the likelihood of a deeper retracement of its 2003 rally. The hortizontal lines show some possible downside targets. A 38% retracment (which is the minimum expectation) calls for a drop to 1800. A 50% retracement (which is more likely) calls for a drop to 1700. A 62% retracment (which is less likely) calls for a possible drop to 1600. While this could still be part of a long-term basing pattern that started in the middle of 2001, it also suggests that the Nasdaq will continue to see lower prices and should continue to exert downward pressure on the entire market. The weekly RSI line may also have to fall to oversold territory near 30 before the decline is over.
Chart 4
LONGER-TERM VIEW OF THE S&P 500... The weekly bars in the S&P 500 chart are also informative. Here again, notice that the early 2004 peak occurred right around the early 2002 peak. Since then, the S&P has been trading sideways with a slight downside bias. The odds for it breaking its May low have increased with this week's breakdown in the Nasdaq market. The blue horizontal lines also provide some potential downside targets. Seasonally, with the time window for a summer rally having passed, the market is drawing closer to the September-October period which is traditionally the weakest time of the year. If the market does continue to fall into October (which now appears likely), a major buying opportunity may present itself. For now, however, cash remains the better option.
Chart 5
AN EVEN LONGER-TERM VIEW... The monthly S&P 500 bars show why it's important to keep an eye on percentage retracement levels -- as well as chart levels. I've shown this chart before, but it's worth showing again. The 2003 S&P rally not only stalled at its early 2002 peak (near 1177) but after having retrace exactly 50% of its 2000-2002 bear market decline. Assuming the S&P breaks its 2004 low, it's logical to assume that it could retrace anywhere from 38% to 50% of its 2003 advance. Based on the retracement lines shown in the previous chart, that would call for a possible decline to the 1025-975 region (see box). That means that things will probably continue to get worse until they can start to get better.
Chart 6
