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November 04, 2006

Intermediate-Term Market Downtrend
by Arthur Eckart

Much of the rally in September and October may be the result of end-of-fiscal-year window dressing. It seems, many financial institutions were caught-off guard by the sustained rally and bought the slightest pullbacks. Consequently, with the fiscal year over, selling may accelerate.

The first chart below is an SPX daily chart. I suspect, the rally above 1,350 was almost entirely driven by panic buying, including short-covering, since the pullbacks became shallow. Also, above 1,350, short-term technical indicators were consistently severely overbought.

SPX has pulled-back to a minor congestion area in the low-1,360s, which is support. There are also support levels in the low-1,350s, around-1,340, and 1,326. I suspect, SPX will not rise much above 1,370 short-term, and a larger pullback may take place before the end of November.

The second chart is a Nasdaq daily chart. A double-top was created recently. The indicators suggest an intermediate-term downtrend has begun. First major support is around 2,300 and then 2,250. However, both SPX and Nasdaq may consolidate somewhat before moving lower.

The current cyclical bull market is the second longest in history without over a 9% correction. If SPX corrects 9% from the 1,390 high, it'll fall to 1,265, which is still above the summer lows. The possibility of a correction over the current intermediate-term downtrend should be taken into account.

Arthur A. Eckart
PeakTrader

Arthur Albert Eckart is the founder and owner of PeakTrader. Arthur has worked for commercial banks, e.g. Wells Fargo, Banc One, and First Commerce Technologies, during the 1980s and 1990s. He has also worked for Janus Funds from 1999-00. Arthur Eckart has a BA & MA in Economics from the University of Colorado. He has worked on options portfolio optimization since 1998.

Mr Eckart has developed a comprehensive trading methodology using economics, portfolio optimization, and technical analysis to maximize return and minimize risk at the same time. This methodology has resulted in excellent returns with low risk over the past three years.

Copyright © 2006 Arthur Eckart

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