JANUARY BAROMETER GIVES BEARISH WARNING -- MONTHLY INDICATORS STILL NEGATIVE -- WEEKLIES SHOW OVERSOLD MARKET IN BEAR MARKET BOUNCE -- NYSE BULLISH PERCENT INDEX IS DEEPLY OVERSOLD, BUT NOWHERE NEAR A BULL MARKET SIGNAL

JANUARY BAROMETER PREDICTS BAD YEAR ... I haven't heard anyone in the media talking about the January Barometer, which is based on the view that "as January goes, so goes the year". That's probably because they only talk about it when the market has a strong January, which predicts a good year. Unfortunately, this January was a very bad one. The 6% loss in the S&P 500 makes it the sixth worst January on record. According to the Stock Trader's Almanac, "the January Barometer predicts the year's course with a .754 batting average. It goes on to state that "every down January on the S&P since 1950, without exception, preceded a new or extended bear market, or a flat market". In addition to a bearish January Barometer, the market had a bad chart month as well. The monthly bars in Chart 1 show the S&P 500 falling -6.12% since the start of 2008 on the heaviest volume in a decade. The monthly stochastic lines (above chart) have fallen to the lowest level since mid-2003. The monthly MACD histogram has been negative for two consecutive months.

Chart 1

S&P REACHES FIRST DOWNSIDE TARGET ... All the news isn't bad. When I last showed the next chart a few weeks back, I suggested that the next downside target for the S&P 500 would be its lower Bollinger band and a 38% retracement of the 2003-2007 bull market. Chart 2 shows that both of those initial downside targets have been reached. That, together with two aggressive Fed easings in a week, probably accounts for the recent market rebound. The question now is whether that bounce has any staying power or whether it's just a bear market bounce.

Chart 2

WEEKLIES ARE OVERSOLD, BUT STILL IN DOWNTREND... The weekly bars in Chart 3 give us a closer look at the market's technical condition. The good news is that the weekly stochastic lines (top of chart) are bouncing from oversold territory below 20. I've transposed the monthly Bollinger bands in Chart 1 to the weekly chart (by using 80-week bands). You can see the S&P bouncing off support at its lower band. The bad news is that the S&P remains below its 80-week moving average (dotted line). It would have to cross back over that line to reverse its current downtrend. In a bear market, the S&P fluctuates between that middle line and the lower band. In other words, there's support at the lower band and resistance at the moving average line (see arrows). The other piece of bad news is that the weekly MACD lines remain negative. This week's bounce caused a minor upturn in the weekly MACD histogram, but not nearly enough to even come close to a bullish crossing. Until and unless we see more improvement in those weekly indicators, technical odds still favor this being a bear market bounce. Chart 3 shows the S&P rallying back to the 1400 level this week. That puts it right up against chart resistance ranging from 1406 to 1430. If the bear argument is still intact, the S&P 500 should meet new selling in that resistance zone.

Chart 3

ANOTHER LOOK AT NYSE BULLISH PERCENT... One of our readers asked for an update on the NYSE Bullish Percent Index. Actually, I'm going to show two versions of it. The first is the line version in Chart 4. The BPI shows the percent of NYSE stocks that are in point & figure uptrends. Generally speaking, readings over 70 show an overbought market, while readers below 30 show an oversold market. That's why the current chart carries both good and bad news. The good news is that the recent drop to 15% has put the BPI in deeply oversold territory. To put that into perspective, I've looked back at how low it dropped during previous downturns: 12% in 1987, 25% in 1990, 18% in 1998, 25% in 2002. That makes the current reading the lowest since 1987. Market upturns in those prior years, however, coincided with BPI readings back over 50%. The current reading of 30% is nowhere near that bullish threshold. That's the bad news. I've applied a 50-day moving average to the BPI line in Chart 4. Bullish upturns in the past had to cross back over that line. So far, it hasn't done that. It would also be nice to see a pattern of "higher highs" develop on the BPI line. For that to start, it would have to exceed its December peak near 49. The point & figure version of the BPI in Chart 5 shows that the BPI would have to hit 50 or higher to give a buy signal. That would also put the BPI back above its bull market threshold.

Chart 4

Chart 5

COMPARISON TO 2003... Chart 6 shows how the NYSE Bullish Percent Index helped signal the 2003 market bottom. The chart shows the BPI hitting 25% in 2001 and again in 2002. A rebound in early 2002 carried all the way to 65%, but didn't turn the market upward. That didn't happen until the BPI moved back over 50 in the spring of 2003, and exceeded its January 2003 peak at the same time (first arrow). The subsequent move over its mid-2002 peak at 65 was an even stronger signal of a major bottom (second arrow). The point & figure boxes in Chart 7 show two buy signals -- one in December 2002 (C) and another in May 2003 (5). Those were the signals that really counted. The moral is this. Not every move back over 50 by the BPI guarantees a new bull market. But a BPI move over 50 is a necessary ingredient for a new bull market to start. The current reading on the NYSE BPI is only 30%. The BPI for the other major stock indexes are 24% for the Nasdaq 100, 26% for the Dow, and 32% for the S&P 500. None of those are near bull market territory either.

Chart 6

Chart 7

S&P 500 NEARS RESISTANCE ZONE ... The market gained more ground today, but on lighter volume. The S&P 500 closed up 1.22% to end the week at 1395. The two lines drawn on Chart 8 show the overhead resistance area that Arthur Hill and I have been writing about. The first (flat) line represents the late-November intra-day low at 1406. That's where the resistance zone starts. The rising trendline represents the "neckline" drawn under the August/November lows. It currently sits near 1430 which also represents a small shelf of resistance formed in early January. The 400-day (80-week) moving average (not shown here) currently sits at 1427, which is right in the middle of the resistance zone. That's a pretty formidable combination of resistance lines. As I've suggested before, the S&P would have to close decisively above the "neckline" to improve its technical condition.

Chart 8