KEEP YOUR EYE ON THE LONG-TERM TREND WHICH CONTINUES TO WEAKEN -- DON'T BUY RALLIES -- SELL INTO THEM
DON'T WORRY ABOUT THE SHORT-TERM ... I've been getting messages asking about my short-term market view. Partially in response, I wrote a message earlier today about the market being in a short-term oversold condition from which a short-term bounce could materialize. That's especially true as the blue chip averages draw closer to their late-January lows. There are times, however, when short-term market views aren't that important. We could be in one of those now. That's why I also made the point earlier today not to expect too much from any short-term market bounce. And why, in my opinion, it was better to sell into rallies than to buy into dips. While daily charts are helpful for short-term timing, weekly and monthly charts are more important in measuring the major trend of the market. Long-term signals also override short-term signals. Right now the signals on long-term charts are pointing down. As is the case with Chart 1.
Chart 1
WEEKLY SIGNALS ARE BEARISH ... Chart 1 is a weekly bar chart of the Wilshire 5000 which is the broadest measure of the U.S. stock market. The weekly bars show that the WLSH is nearing a test of its late-January low at 11449. It may bounce off that level temporarily. But odds are strong that it will break that level sooner or later. That's due mainly to the position of the two technical indicators shown on the chart. The 9-week RSI above the chart shows a "negative divergence" (blue arrow) occurring during the late-February move into new highs by the price bars. Since then, the RSI line has fallen below its January low 50. That's a bearish signal. The weekly MACD lines overlaid on the price bars look even worse. The top red arrow shows another negative divergence between the MACD lines and the February price peak followed by a negative crossing by the two lines. That sell signal is seen more clearly seen on the green histogram bars under the price chart. The histogram plots the difference between the two MACD lines. The actual sell signal took place when the histogram bars fell below the zero line. One of the advantages of the histogram is that it peaks before the MACD lines -- as it did throughout the first three months of this year. That's because the two MACD lines have to "converge" before they can cross. Keep that in mind on the next chart.
MONTHLY TREND IS WEAKENING ... Chart 2 applies the same two indicators to the monthly Wilshire 5000 chart. The 9-month RSI line has just turned down from overbought territory over 70. A case could be made that the RSI failed to confirm the late 2004 rally to a new recovery high (see blue arrows). That's a negative warning. The monthly MACD lines turned positive in the spring of 2003 (green circle) and have been positive since then. No negative crossing by the two lines has taken place yet. But they're starting to converge. That weakening can be seen in the green histogram bars. Notice that the histogram peaked at the start of 2004 and didn't expand much during the late 2004 market advance. The histogram bars are now at the weakest level since the spring of 2003. Just as the MACD histogram turned up in the fourth quarter of 2002 and anticipated the major buy signal the following spring, the fact that it's turned down may also be anticipating a major sell signal in the MACD lines. The monthly MACD lines haven't given a major sell signal yet, but they're getting close.
Chart 2
A LONGER-TERM VIEW OF MACD HISTOGRAM... Chart 3 overlays the MACD histogram over the monthly bars of the WLSH for the last five years. In that period of time, only two signal have been given. [A signal is given when the histogram crosses over or under the zero line]. The red arrow shows the last sell signal in the spring of 2000. The last buy signal was given three years later in the spring of 2003 (green arrow). Notice that the histogram bottomed almost a year before the spring 2003 bottom. It's been a year since it peaked at the start of 2004. [The Wilshire also appears to have completed a five-wave advance from its 2002 bottom and has retraced 62% of its 2000-2002 bear market]. With the weekly chart already on a sell signal, and the monthly chart close to one, short-term buy signals on daily charts usually don't work too well. Don't worry so much about the short-term trend. Trade in the direction of the long-term signals.
Chart 3
HAPPY EASTER ...
