BREAKING OF 50-DAY AVERAGES SIGNALS MARKET CORRECTION -- WEEKLY CHARTS OF NASDAQ AND S&P 500 POSTED IN FEBRUARY SHOWED THAT BOTH MARKETS HAD REACHED LEVELS WHERE A CORRECTION WAS LIKELY -- DOLLAR BOUNCE PUSHES COMMODITY ASSETS LOWER
LONG-TERM CHARTS SHOWED OVERBOUGHT CONDITION ... Today's sharp selloff in stocks and commodities certainly suggests that the market has entered into a downside correction. The number of 50-day moving averages being broken by most global stocks indexes (including those in the U.S.) has given the first short-term sell signal during 2011. This correction, however, shouldn't come as a complete surprise. At least not to those who keep an eye on long-term weekly charts. It's important to keep in mind on where where this correction started from. And why it's important to know where the market is from a longer-term perspective. Back on February 22 I wrote a message on why the market had reached upside targets and was in a dangerously overbought condition from which a correction could logically be expected. The two first charts are taken from that earlier message. In addition, the following comments were written on February 22:
"Long-term charts show an overbought stock market that has reached levels from which a downside correction would normally be expected. Chart 1 shows the S&P 500 having doubled in price from its spring 2009 low. In addition, the 14-week RSI (solid line) has reached overbought territory over 70 for the first time since the bull market began. That looks like a market in need of a correction. Even more compelling is the chart of the Nasdaq Composite Index which is testing its 2007 high (see circles). Its weekly RSI line is also in overbought territory and showing negative divergence (red line). Those two factors suggest that the Nasdaq uptrend is in need of a breather as well. None of these charts suggest a major top. They may justify some short-term profit-taking (or the taking of some defensive action to protect existing profits). For longer-term investors, however, a downside correction is a normal part of any major uptrend and should offer better entry points at lower levels".
Chart 1
Chart 2
NASDAQ AND S&P 500 BREAK 50-DAY LINES... Charts 3 and 4 show the short-term technical damage done to the Nasdaq Composite and S&P 500 SPDR. Both closed below their 50-day lines on rising volume. The Nasdaq did so more convincingly which is a bad sign. That's because the Nasdaq usually acts as a leading indicator for the rest of the market. Most other US indexes have also broken that support line or are close to doing so. A glance at the large red volume bars over the last few weeks shows that volume has been heavier on the down days. That's normally a sign of distribution going on and is often a prelude to a deeper price correction. A bounce in the U.S. Dollar pushed commodities sharply lower on fears of a global economic slowdown. Basic material and energy stocks were among the biggest losers. Defensive stocks like consumer staples and utilities held up better than most. Bond prices rallied in a flight to safety. Markets don't go up in a straight line. Weekly charts sounded a warning that this one had reached levels from which a correction was likely. What better time for one to start than on the two-year anniversary of the March 2009 bottom.
(click to view a live version of this chart)
Chart 3
