BEARISH MONTHLY AND WEEKLY MOMENTUM LIMITS POTENTIAL FOR BOUNCES ON DAILY CHARTS

DOWNSIDE WEEKLY MOMENTUM LIMITS DAILY BOUNCES... I keep emphasizing the importance of long-term indicators. That's why I wrote yesterday that I doubted that the mid-week rally attempt would get very far in the face of deteriorating weekly and monthly technical indicators. "Daily" charts give us a view of the market's "short-term" trend. I always advise short-term traders, who rely on daily price charts, to keep an eye on "weekly" signals as well. That's because signals on weekly charts override daily signals. A buy signal on a daily chart won't work if the weekly chart is on a sell signal. To demonstrate that point, chart 1 mixes the two time frames. It overlays a 13"week" Rate of Change (red) line on a "daily" chart of the S&P 500 (black line). [I do that by converting a 13-week ROC to 65 days]. That gives us a better idea of how a longer-range trend is influencing the market. When the S&P hit a new high in October, the red ROC line fell short of its spring high. That was a negative divergence. While the S&P 500 is threatening its August intra-day low, the red weekly ROC line has already fallen below its 2006 bottom (to a five-year low). It's hard for any short-term bounce to get very far when weekly momentum is falling so hard.

Chart 1

MONTHLY SIGNALS LEAD WEEKLY TRENDS... To further demonstrate the importance of long-term trends, Chart 2 compares a "monthly" Rate of Change (red) line to a "weekly" chart of the S&P 500 (black line) over the last ten years. [I do that by converting a 13 month ROC line to 56 weeks]. That chart clearly demonstrates that the monthly ROC line acts as a leading for weekly price trends. The ROC line led the market lower from 2000 to 2002 and higher in 2003. Although the monthly ROC never reached the same level as it did in 2004, it did continue rising from 2005 to mid-2007. That upward trend can be seen more clearly in Chart 3. After peaking last July, however, the monthly ROC line has plunged to the lowest level in five years. More importantly, it has fallen below its zero line which qualifies as a potential major sell signal. [Since it's a monthly signal, it doesn't become official until the end of January]. Chart 2 shows only two prior signals in the last decade -- a major sell in late 2000 and a major buy in mid-2003. To come back to my original premise, it's difficult for a short-term bounce to get very far when the longer-range monthly trend is in such a weak condition.

Chart 2

Chart 3

DAILY ROC LINE IS ALSO NEGATIVE ... Finally, we get to the short-term trend. I wrote yesterday about the S&P 500 (and Dow Industrials) threatening chart support at their August intra-day lows. Thursday's bounce in the S&P 500 failed to clear the 400-day moving average (blue line), which also resembles a "neckline" drawn under the August/November lows. The inability to climb back over that new resistance line adds more credibility to the idea of "double top" or "head and shoulders" top being formed. The 13-day Rate of Change (black) line remains in negative territory. For a decent market bounce to occur, the daily ROC line would have to exceed its zero line. That seems unlikely with the monthly ROC line turning negative for the first time in five years.

Chart 4