IT STILL LOOKS LIKE THE BEAR MARKET RALLY IS ENDING -- SHORT-TERM ROC LINES HAVE TURNED NEGATIVE -- LONG-TERM ROC SHOWS MARKET STILL IN BEAR MARKET -- VIX JUMPS 10% -- NASDAQ FAILS AT 200-DAY AVERAGE FOR SECOND TIME
NASDAQ FAILS AGAIN AT 200-DAY LINE... The Nasdaq has been one of the strongest parts of the market during the recent rally. Today, however, it was the weakest. And it's coming at a bad time. Chart 1 shows the Nasdaq Composite failing for the second time in two weeks at its 200-day moving average. It's 9-day RSI line is starting to roll over as well. The daily MACD lines turned negative last week (and they did on all of the other major averages). Other pockets of weakness today were airlines, consumer discretionary, financials, and small caps. As far as I can see, nothing has changed in the market's technical picture. We've been saying all along that we view the rebound from mid-March as a bear market rally. So far, it's done just what a bear market bounce should do. It's retraced about half of its prior downtrend and is meeting serious resistance at its 200-day moving average. A lot of short-term indicators have turned down.
Chart 1
RATE OF CHANGE TURNS NEGATIVE ... I recently used the 12-day Rate of Change (ROC) indicator to show that the market rally was starting to weaken. Today's charts show that short-term momentum is getting even weaker. Chart 3 shows that the ROC for the Nasdaq has been weakening since the start of May. It's in danger of slipping into negative territory and breaking its three-month support line. The S&P 500 (Chart 4) and the Dow Industrials (Chart 5) have already fallen below their zero lines. In my view, those constitute short-term sell signals.
Chart 2
Chart 3
Chart 4
STILL IN BEAR MARKET TERRITORY ... Monthly charts are the most important of all because they're the ones that tell us whether we're in a major bull or bear market. Chart 5 plots a 12-month ROC on the S&P 500 (not shown here). That long-term indicator has dipped into bear market territory four times in the last eighteen years. The first three times in 1990, 1994, and 2000 have been classified as bear markets. Those bear markets didn't end until the ROC rose back above its zero line. That happened in 1991, 1995, and 2003. In all three instances, a new bull market began. At present, the ROC line is still in bear market territory.
Chart 5
VIX CLIMBS 10% ... The CBOE Volatility (VIX) Index continues to bounce strongly off chart support at its October low. Its short-term momentum is also improving. That's a bad sign for stocks. Chart 6 shows what happened the last three times 12-day ROC turned positive for the VIX -- last October, early January, and early March. In all three instances, the market sold off. The market didn't bounce again until the VIX peaked at much higher levels. The black circle to the bottom right shows that the ROC line for the VIX has just turned positive for the first time since March when the recent rally started. That's just another warning that the market is in danger of rolling over to the downside.
Chart 6
