THE DOW TESTS MAJOR LONG-TERM SUPPORT LINES -- BUT ANY REBOUND COULD MEET WITH NEW SELLING -- A BEAR MARKET HAS LIKELY BEGUN -- THE QUESTION IS HOW LONG AND HOW DEEP
DOW DROPS INTO BEAR TERRITORY... Friday's strong rebound helped prevent a very bad week in stocks from getting worse. And it came at a good time. That's because of number of U.S. stock indexes are nearing tests of major long-term support lines. We'll focus today on the Dow Jones Industrial Average which is the most widely followed measure of the U.S. stock market. The monthly bars in Chart 1 show the eleven-year bull market that started in March 2009. The last two red bars shows the Dow dropping more than 6000 points from its February peak through Friday's close for a percentage loss of more than -21%. Drops of more than 20% generally signal the start of a bear market. Other U.S. stock indexes also fell below the 20% threshold this past week (as did most foreign stocks). Bear markets, however, are also signalled by the breaking of long-term support levels. And Chart 1 shows two of them being tested this past week.
ELEVEN-YEAR TRENDLINE BEING TESTED... Chart 1 plots a monthly bar chart of the eleven-year bull market in the Dow. And a rising trendline drawn those bull market lows. And it shows this week's low in the Dow coming dangerously close to that long-term support line. The other major support level is its late 2018 intra-day low at 21,700 (green circle). An uptrend is usually defined as a pattern of rising peaks and troughs. Which means that any significant drop below that previous reaction low would be a bearish signal. The last monthly bar shows the Dow slipping below that support level during the past week, before recovering at week's end. Friday's strong rebound kept the Dow above that important support level and prevented a serious breakdown. Let's take a closer look at that test.
DOW REBOUNDS JUST IN TIME...The weekly bars in Chart 2 show the Dow ending the week at 23185 (black circle) resulting in a big weekly loss of -10%. The good news is that Friday's jump of 1985 points (+9.3%) kept it above its December 2018 intra-day low of 21,700 (green trendline). The big question is whether or not the Dow can build on Friday's gains. And stay above its late 2018 low. One encouraging sign is that its 9-week RSI line in the upper box has fallen to 21 which its most oversold level since 2008. Even if the Dow does manage to rebound over the short run, the lines drawn overhead in Chart 2 may limit those gains. The red Fibonacci retracement lines measured from the February high to this week's intra-day low should act as overhead resistance. In addition, the overhead blue lines mark broken support levels which should now act as overhead resistance. The two lower blue lines put initial overhead resistance for the Dow between 24,700 and 25,300. Which fits in between the 38%-50% Fibonacci resistance ines.
A LOOK AT OVERHEAD RESISTANCE LINES... The daily bars in Chart 3 show those Fibonacci retracment lines more closely. It's more than likely that any serious rebound attempt by the Dow will meet resistance at those lines. One encouraging sign is the positive divergence in the 14-day RSI line in the upper box. The fact that this week's reaction low is above its late February low is mildly encouraging over the short run. The bad news is that its daily MACD lines (lower box) are still negative. As are its weekly and monthly MACD lines. Which means that any short-term price improvement has to be measured against longer-range indicators warning of a weaker stock market.
BULL MARKET HAS ENDED... All of the longer-range technical indicators that I look at have turned bearish, which suggests that the eleven-year bull market in stocks has ended. And that a bear market is probably starting. The question is how long will it last, and how far will it drop. We have to look at the charts to help determine that. Charts 1 and 2 above show the Dow Industrials testing major support lines. The same is true for other U.S. stock indexes. Prices closing below those support lines would signal a deeper bear market. Foreign stock indexes have already broken those support lines. Which strongly suggests that things will probably get worse before they can start getting better. Maybe we'll get lucky and the threat from the coronavirus will pass quickly. And things will start returning to normal. But we have no way of knowing that. All we have right now are the charts in front of us. And they don't look very encouraging.
