MARKET DOWNTREND APPEARS TO BE RESUMING -- NEXT DOWNSIDE S&P TARGET IS LOW FORMED DURING SUMMER OF 2006 -- TIPS LEAD STRONG BOND RALLY -- YEN ETF OFFERS PROFIT PROTECTION AGAINST A FALLING DOLLAR AND FALLING STOCKS

MARKET DROPS ON EXPANDING VOLUME ... I suggested on Thursday that this was a logical spot for the market rally to fail and fail it did. The fact that Friday's big selloff came on expanding volume (and bad market breadth) just added to the degree of short-term damage done. The most vulnerable to the start of another downleg is the Nasdaq Composite Index, which has been trading sideways in a bearish triangular formation. The lower trendline was broken on Friday (Chart 1). Both the Dow and the S&P 500 appear to have failed a test of their 50-day averages and chart support at their early February peaks. I've suggested before that in dangerous times like the present it's better to keep an eye on long-term indicators and not fret too much about short-term bounces. That helps keep things in better perspective. So let's do that.

Chart 1

Chart 2

Chart 3

MONTHLY MACD LINES REMAIN NEGATIVE ... A number of readers wanted to know if a new bull market was starting earlier this week. They wouldn't need to ask that question if they looked at the monthly S&P 500 chart. I've shown before that the monthly MACD lines turned negative during December for the first time in five years. There's no sign of that major sell signal being reversed. And no sign of the old bull market being revived or a new one starting.

Chart 4

WEEKLY MACD LINES ARE ALSO NEGATIVE ... I often advise traders who follow short-term buy and sell signals on daily charts to use weekly signals as a filter. If they had, they wouldn't have gotten too excited about the recent stock market bounce. Chart 5 overlays weekly MACD lines on weekly bars of the S&P 500 over the last four years. A weekly sell signal was given during October, which hasn't even come close to reversing. In fact, the MACD lines have fallen to the lowest level in five years. Short-term bounces don't usually get too far when weekly and monthly trends are negative. And that is the case at present.

Chart 5

NEXT DOWNSIDE TARGETS ... On February 14, I included a headline which read: "Wave Patterns Suggest At Least One More Downleg". The gist of the article was that major downtrends usually form at least five waves. Up to the present, only four have formed -- the fourth being the recent consolidation/bounce (see Chart 6). I also explained that triangles (like the one on the Nasdaq) are usually fourth wave consolidations, which are usually followed by another downleg. [Please refer back if you didn't read it or want to refresh your memory]. My main intention here is to revisit the next likely downside target if new lows are hit (which appears likely). My earlier article gave a downside target for the S&P 500 at 1225 which also happens to be the summer 2006 low. That would put the S&P 22% below its fourth quarter high and in bear market territory. Chart 7 shows the next downside target for the Nasdaq just above the 2000 level, which is also the mid-2006 low. That's 30% below its October peak. Chart 8 shows that a Nasdaq drop to 2000 would also be a fifty percent retracement of its 2002-2007 bull trend.

Chart 6

Chart 7

Chart 8

TIPS LEAD BOND RALLY... On Thursday, I showed that bond prices were bouncing off their 50-day averages while stocks were failing at theirs. That's because bad news for stocks is usually good news for bonds. While all bond ETFs jumped this week, the best performance came in the iShares Lehman TIP Bond Fund (TIP). Chart 9 shows the TIP gapping up to a new high and on rising volume. I've suggested recently that TIPs give the protection that bonds usually offer from a weakening economy (and stock market) and rising inflation (rising commodities). That seems to be what investors are looking for right now.

Chart 9

HAVING A YEN FOR PROFITS ... One of the main points that I've tried to make is that there are lots of ways to make money during a bear market in stocks. One is to buy a bear market fund which rises as the market falls. Another is to buy asset classes that have been rising since last summer -- like bonds and/or commodities. Let's not forget currency markets. The positive side of a record low in the U.S. Dollar is that foreign currencies are rising. I wrote a piece yesterday about how the Japanese yen had gone from the world's weakest foreign currency since 2000 to the strongest since last summer. I also pointed out that the yen uptrend that started last summer (and the unwinding of its carry trade) is one of the reasons that global stocks are falling. One way to benefit from that trend is to own some yen. One of the easiest ways to do that is via the Currency- Shares Japanese Yen ETF (FXY). Chart 10 shows it hitting a new high this week. I believe it's better to buy something in bull market rather than something in a bear market. [Please see Friday's Market Message for more on the bullish outlook for the Japanese currency]. Showing the yen chart also allows me to end a dismal week on a positive note.

Chart 10