Several Indicators Point To A Test Of The October Lows

• Indexes Reach Resistance and Retrace 61.8% of the Decline
• Hourly Charts Offer the First Domino
• Short-Term Breadth is Overstretched
• NASDAQ Sports a Series of Declining Peaks and Troughs

Indexes Reach Resistance and Retrace 61.8% of the Decline

The market has been on a tear for the last couple of weeks, responding to a deeply oversold short-term condition and an extreme in pessimism. Some of the short-term indicators that monitor trends lasting between 4-6-weeks, such as the daily KST, are still oversold and in a bullish trajectory, as you can see for the DIA in Chart 1. However, most of the very short-term indicators and several other characteristics suggest that a test of the lows is likely before we can start to think of higher prices. Indeed, a lot of my longer-term indicators are signaling a fairly high probability that we are in a primary bear market. How the market responds to any corrective action could be crucial in providing clues as to whether we get more bear market evidence or whether indications of a continuing bull trend are given.

Chart 1

One indication that prices are near-term vulnerable comes from Chart 2, where we can see that the rally returned the S&P Composite right back to its previous high. Previous highs and lows represent potential resistance and support areas. The lower window also points to the fact that there are a couple of unfilled gaps on the downside. In the majority of cases, gaps are filled, or at least a good attempt is mounted to close them. That’s not always the case, though, and we never know exactly when the attempt will take place. However, the fact that these gaps have remained open is further evidence that prices are likely headed lower in an attempt to fill them.

The upper panel shows that the recent rally retraced about 61.8% of the previous decline, which again hints that the October/November bounce has run its course. The one potential positive comes from the fact that the S&P could be in the process of tracing out an inverse head and shoulders pattern. Further corrective action, followed by an upside breakout that could hold, is required for completion.

Chart 2

Chart 3 builds on the 61.8% retracement idea, as both the NYA and MSCI World ETF (the ACWI) rallied back approximately to this number and their mid-October highs, both of which are likely to be near-term pivotal points.

Chart 3

Hourly Charts Offer the First Domino

Speaking of near-term, Chart 4 features hourly price action for the S&P together with a stochastic and RSI. The red arrows point out periods when the RSI crosses through its overbought line - these are confirmed by overbought peaks in the stochastic. Typically, this combination flags that a 2- to 3-day correction is likely.

Chart 4

That’s important in the current context because the 12-day ROC for the S&P Composite in Chart 5 is overbought but still rising. A couple of flat to down days would therefore be sufficient to reverse the upward trajectory of this indicator. The red arrows show that recent reversals from an overbought reading were followed by a 2- to 3-week decline.

Chart 5

Short-Term Breadth is Overstretched

Chart 6 features a 10-day ratio of NYSE A/D data. It, too, is in an overstretched condition. The dashed arrows show that, occasionally, reversals from such a reading do not have much of an effect on the S&P. However, there are far more solid arrows that indicate that it does. The chart also holds out the possibility that the S&P may be in the process of forming the right shoulder of a bearish head and shoulders formation. That would only become reality in the event that the thick red potential neckline is violated. The key level in that regard is a decisive daily close that can hold below the previous low of 2640.

Chart 6

NASDAQ Sports a Series of Declining Peaks and Troughs

Chart 7 shows the 12-day ROC for the NASDAQ. It, too, is in an overbought condition, and consistent with a forthcoming correction. Note that, since its all-time-high, the Index has been tracing out a series of declining peaks and troughs. The latest rally has so far failed to take out the previous peak, thereby maintaining the declining trend.

Chart 7

Finally, Chart 8 shows that the recent advance has been lacking in volume, as activity has been shrinking since early October. This can also be appreciated from the sharp drop off in the PVO to what is now a moderately oversold condition. If volume now expands on the downside, that would be doubly unfortunate.

Chart 8

Good luck and good charting,
Martin J. Pring

The views expressed in this article are those of the author and do not necessarily reflect the position or opinion of Pring Turner Capital Group of Walnut Creek or its affiliates.