RECENT DOWNTURN SUGGESTS BEAR MARKET BOUNCE MAY HAVE ENDED -- NYSE RETESTING 200-DAY AVERAGE

DOW AND RUSSELL 2000 STILL BELOW 200-DAY LINES ... Despite the recent market bounce (which may be ending), the market still has major bearish bias. Charts 1 and 2 show the Dow Industrials (Chart 1) and the Russell 2000 Small Cap Index (Chart 2) unable to exceed their January lows and their 200-day moving averages. That gives the current bounce in those two important stock indexes the look of a bear market bounce. Other stocks indexes have fared better, but not much better. Their recent bounce may also be ending. Part of the reason has to do with their failure to exceed their 50-day lines. Another part has to do with their volume patterns. Downside volume has been heavier than upside volume.

Chart 1

Chart 2

S&P 500 BACKS OFF FROM 50-DAY LINE ... The price action in the S&P 500 Index is more symptomatic of recent action in the market. The S&P recovered nearly half of its March/April decline, but failed a test of its 50-day moving average. It's now in danger of falling back below its 200-day line. A closer inspection of the S&P chart shows another potentially negative short-term pattern. A corrective rally (in this case up) normally takes place in three waves (ABC). The start of a new uptrend takes place in five waves. One way to tell the difference is when prices fall back below their breakout level at point A (the late April peak at 1164), which has already happened. That usually signals that the bounce has ended and that another downleg is starting.

Chart 3

WATCH THE NYSE FOR BEARISH CONFIRMATION ... Earlier in the week I wrote about the NYSE Composite Index which was the only one of the major stock indexes to stay above its 200-day moving average during April. In my view, that gives the impending test of that long-term support line added credibility. Chart 4 also shows that the daily stochastic lines, which turned up from oversold territory at the end of April, have now turned down from overbought territory over 80. That's another sign that the short-term bounce has ended. An NYSE close beneath the 200-day average would be added confirmation that bearish forces are once again taking control of the market.

Chart 4