MARKET AVERAGES ARE TESTING KEY SUPPORT LEVELS -- LONG TERM TREND OF THE MARKET STILL LOOKS TOPPY
PULLBACK IN OIL MAY BE HELPING ... Everywhere we look we see essentially the same chart picture. The major stock indexes are struggling to hold at the first key support levels drawn under their August lows. Chart-watchers know that's a very important test. Even before the recent hurricanes (and the latest spike in energy prices), I was writing about what I believed to be the final stages in the cyclical bull market that started in the spring of 2003. I showed the loss of upside momentum in weekly and monthly charts. I stressed, however, that no long-term sell signal had been given. That's still the case. But the market is sitting at a crucial point. As long as the August lows hold, no serious damage will have been done. A decisive close below the August lows, however, would turn short-trends lower and threaten 200-day averages. It would probably be enough to turn the weekly charts lower as well. Earlier in the day, I wrote that the energy patch looked overextended and could be starting a downside correction. I also wrote that crude oil could be forming a short-term top. A lot will depend on the amount of damage done by Hurricane Rita over the weekend. We'll know a lot more about that on Monday. If energy prices do drop next week as I suspect, that could give a short-term boost to the stock market. But I doubt that it will be enough to keep the cyclical bull market going much longer. Chart 4 shows why.

Chart 1

Chart 2

Chart 3
WEEKLY TREND STILL LOOKS WEAK ... The weekly MACD lines for the S&P 500 show why I remain very concerned about the market's long-term trend. First of all, notice that the pattern of lower peaks in the MACD lines since the start of 2004 as prices have moved into new recovery highs (see falling trendline). That's a big warning sign. To the far right, you can see that the MACD lines are very close to turning negative (see arrow). That would be the second downturn this year and the third since the start of 2004 (see circles). Second or third signals on the MACD lines are usually the most serious. Seasonal considerations aren't favorable either as we enter the dangerous month of October. There's another lesson to be learned from studying the weekly price charts. And that is that the market trend has been deteriorating all year. It didn't start with Hurricane Katrina and the latest spike in oil prices although they may have made the situation worse. While the media keeps the TV screen on the latest hurricane path, I'd suggest you keep your eyes on the price charts. They'll prove more reliable than hurricane watching.

Chart 4