DOWNSIDE MOVING AVERAGE CROSSINGS INCREASE MARKET RISK -- 10 - AND 40- WEEK EMA DOWNTURN HAS GOOD TRACK RECORD OF IDENTIFYING BEAR MARKETS -- SO DOES 13-34 WEEKLY COMBINATION WHICH ALSO TURNED DOWN
10 WEEK AVERAGE FALLS BELOW 40 WEEK ... Another sign that the stock market has probably entered a bear market is the fact that the 10-week moving average (or 50-day) has fallen below the 40-week (or 200 days). [For long term signals like these, I prefer weekly to daily signals].
Chart 1 shows, however, that the downward crossing by the simple blue and red lines isn't always a reliable signal. A downward crossing took place last summer shortly before the market turned back up again. That doesn't mean the downside crossings should be ignored, but that they don't always work. By comparison, much more reliable signals have been given by the 10- and 40- week EMA lines. Unfortunately for the market, those two lines also turned negative this week as well. Chart 2 compares the 10- and 40- week EMA lines over the last decade. Only three bear signals have been given during that time span which include late 2000, the end of 2007, and this week (see vertical lines). The two previous downside crossings marked the start of bear markets.
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Chart 1
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Chart 2
13 AND 34 WEEKLY EMAS ALSO TURN NEGATIVE... Another favorite moving average combination of mine turned negative this week. Chart 3 shows the 13-34 week EMA combination turning negative this week for only the third time in the last decade. The absence of false signals by this moving average combination also lends more weight to this week's bearish signal.
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Chart 3
S&P 500 BREAKS MID-BAND SUPPORT... Another bearish moving average signal has been given on monthly Bollinger bands. The middle line on Chart 4 is the 20-month moving average which is the standard time span to use on Bollinger bands (20 days, 20 weeks, 20 months). The chart shows that the 20-month average acts as support in an uptrend and resistance in a downtrend. The circle to the right shows the 20-month average being violated for the first time since the start of 2008. A similar downside violation took place in late 2000 at the start of that earlier bear market. At such times, the minimum downside target is the lower band which currently sits just below 1000 for the SPX. That next downside target also coincides roughly with the mid-2010 correction low near 1010 which I recently identified as my next downside target.
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Chart 4
USE SAME SIGNALS IN ALL TIME DIMENSIONS... One question that kept cropping up at last week's Chartcon 2011 conference in Seattle hosted by Stockcharts was the proper time span to use in different time dimensions. For most indicators, the correct answer is to use the same indicator parameters in all dimensions. Each indicator has a "default" value that is used by most analysts. For RSI as an example, a 14 period is normally used. On a daily charts, we used 14 days. On weekly and monthly charts, we use 14 weeks and 14 months. [Even intra-day charts use the same values]. MACD uses the three "default' values of 12,26,9 in all time dimensions. Bollinger bands use 20 periods in all time dimensions. [Even my favorite 13-34 EMA combination uses the same numbers on daily, weekly, and monthly charts]. The one exception to this rule has to do with moving averages. Chart 5 shows the normal 50- and 200 simple moving average combination used by most analysts. When switching to a weekly chart, however, you can't just use the same numbers which would result in a 50- and 200- "week" combination. What you need to do in that case is change 50 days to 10 weeks and 200 days to 40 weeks (in other words, divide each daily number by five which is the number of trading days in one week). That will match your daily moving average signals with your weeklies (Chart 6). You'll then see both daily and weekly combinations turning negative this week (see circles).
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Chart 5
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Chart 6
SILVER BREAKS OUT... Please refer to John's Latest Performance Chart for a glance at leading gold stocks, some of which have risen as fast as gold during August and others that have risen faster than the group as a whole. Although gold stocks have lagged behind the commodity, Chart 7 shows that they've still acted as a relative safe haven during the recent market slide. Chart 7 also shows the Market Vectors Gold Miners Index (GDX) nearing a test of its July peak. At current levels, gold stocks look like a relative bargain compared to the commodity. This week's upside breakout in silver (Chart 8) should also give a boost to silver stocks that have been group laggards.
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Chart 7
