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NASDAQ and S&P500 - The Technical Take

The stock market action of the past week only confirms what I have been saying for the last 6 weeks and that this is not a favorable environment for investors. And my opinion still has not changed.

With support at much lower levels, too many retail players positioned the wrong way, and breadth confirming the price action, I expect lower prices on both the NASDAQ and S&P500. And where she stops nobody knows, but we will let the charts be our guide.

Price Structure Analysis

Figure#1 is a weekly chart of the NASDAQ (see below). Over the price bars is what I call a thrust channel (parallel blue lines), and the purpose of this indicator is to help identify significant up and down thrusts in price. These significant thrusts are then labeled with the horizontal dots on the graph, and these will act as major areas of support and resistance.

The zone of support ("area 1") between 1946 and 1906 has clearly been violated, and with a close below 1906, the downtrend in the NASDAQ has now been confirmed. Since old support becomes resistance, "area 1" is now our zone of upside resistance. And being a down trend, all rallies should be sold.

Figure #1/ NASDAQ/ weekly

The next area of support on the weekly chart comes in at 1734 ("area 2"). This is only 6% away from current levels.

Another point of interest on the weekly chart is the fact that the 200 day moving average (red line on price chart) has turned down; this too tends to act as upside resistance. Also, this price move is starting from a low volatility situation as seen in the squeeze indicator in the bottom plate. Volatility has been low for a long time as we all know. But eventually low volatility will give way to higher levels of volatility - this is one of the few axioms in the market that is actually true! Although volatility does not predict direction, it appears that volatility is beginning to increase - note hooking up of the indicator- and with the trend being down and so many people poorly positioned, the possibility of lower prices is likely.

Figure #2 is a daily chart of the NASDAQ. The down trend channel is nicely established and price is projected to hit the lower channel at around 1800- a nice round number. This coincides with a support zone ("area 1") between 1760 and 1792.

Figure #2/ NASDAQ/ daily

Over on the S&P500 the picture is no different. A down trend has been confirmed on the weekly charts, and price currently is in a low volatility situation. Support comes in at 1000 on the weekly chart. On the daily chart, support is at 1069.

So where is price going to stop? Is it support on the daily chart or will support on the weekly be the last line in the sand? To this I don't have the answer. These are just levels where we can expect the market to pause, and therefore, it is important to watch the action around these levels.

My opinion is that eventually the support on the daily charts will not hold, and support on the weekly charts will be seen. As we will see in the next couple of graphs, current levels of sentiment still remain too bullish, and market breadth still confirms the price trend. When the investing public is bearish and there are divergences between market internals and price, then it will be time to go long.

Conclusion: Significant technical levels have been broken and a down trend has been confirmed on both the NASDAQ and S&P500.

Sentiment

Figure #3 is a graph of the NASDAQ and our sentiment indicator. The indicator, which is shown in the lower panel (red line), is a composite of several sentiment surveys that are looking at the opinions on the stock market of 4 different market participants. The studies under consideration are the Investors Intelligence (polling newsletter writers), American Association of Individual Investors (polling individual investors), Market Vane Bulls (polling investment advisors) and Put- Call ratio (quantifying behavior of option players). While there is nothing new regarding my use of this data, my methodology of how I look at the data requires a bit of an explanation. First all the data is smoothed over a 4 week period and each 4 week moving average is wrapped in adaptive bands that look for extremes in the indicator relative to values over the past year. Using the adaptive bands is useful in that most people would agree that there are no absolute extremes from era to era. Extremes are relative and using adaptive bands helps identify extremes based upon the past activity of the indicator and not on some pre-determined level. Each indicator is then given a score based upon its proximity to the upper and lower bands. The composite indicator then is the average of all four indicators.

Figure#3/ NASDAQ/ sentiment

Ok got it?

Returning to figure #3 we can see that our composite sentiment indicator is nowhere near registering bearish opinion (bullish for the stock market). The interpretation is that our 4 different sets of market participants are still very bullish on the market. And if you compare, point A to point B, these people were actually more bullish even though the market was lower in price. And on the flipside comparing points C and D, they are still more bullish even though the market is lower. Kind of odd, but these divergences suggest that lower prices are in order.

Forget the composite indicator for a moment and just realize that data from this past week surveys suggests one and half to two times as many bulls as bears!

I want to introduce a new indicator that also looks at investor fear and greed. This indicator measures the level of asset flows into the Rydex Money Market mutual fund. Rydex Funds, which are typically used by retail investors attempting to time the market, provides the amount of assets in each of their funds on a daily basis. This is not a survey of one's opinion but actually where people are putting their money! The premise of this indicator is that when money market levels are low, investors are bullish and there is much complacency in the stock market. It is at these times that markets undergo distribution and "tops out". On the other hand, when asset levels are high, investors are bearish on the stock market and avoiding risk at a time when they should be taking on risk.

Figure #4 is a daily chart of the NASDAQ and the middle plate is a graph (green line) of the asset flows in billions of dollars into the Rydex Money Market Mutual Fund. As you can see, when assets in the money market fund are high, the market is usually making a bottom. I have circled those times in the past 2 years where there were high levels of cash on the sidelines (thatched ovals). Conversely, at market tops, assets are low and those instances are also noted (red ovals). Currently, assets in the Rydex Money Market Mutual Fund are high but they haven't reached the level of previous bottoms. Furthermore, the relative strength indicator (shown in the lower plate), which is wrapped in adaptive bands to help identify intermediate extremes in asset flows, has not reached an extreme as well.

Figure#4/ NASDAQ/ daily/ Rydex Money Market

Conclusion: Sentiment remains too bullish in lieu of technical breaks noted above.

Market Breadth

Figure #5 is a daily graph of the NASDAQ with the hidden data being new highs and new lows. The second plate depicts a 10 day moving average of the number new highs minus new lows, and you can see how this indicator is breaking to new lows. The third plate (or red histogram) depicts the number of new lows and you see how this has expanded past the most recent peak. The bottom panel (or green histogram) shows the new highs and this has been in a steady down trend since January. The importance of following market internals at times like this cannot be overstated. Typically during a sell off, the number of stocks making new lows will slow even though prices continue lower. This would be a positive divergence. Currently, the increasing new lows are only confirming the decrease in prices.

Figure#5/ NASDAQ/ New Highs, New Lows/ daily

Conclusion: Market breadth confirming price action.

My expectations for higher prices are somewhat diminished. Key support levels have been broken and a down trend is firmly in place. This in and of itself does not guarantee lower prices but with the ever present bullish mantra of "what me worry" and eroding market internals, I am expecting lower prices. I would think NASDAQ 1800 and S&P500 1069 would provide initial support, but I don't think there will be much interest until weekly support levels come into play.

That is TheTechnicalTake!

The Technical Take

$ stock market facing stiff headwinds
$ down trend is in place on both S&P500 and NASDAQ
$ sentiment remains bullish (bearish for stocks)
$ market breadth confirming lower price action

Thanks for reading and I hope you have found my analysis informative, insightful and profitable.... If you would like more information regarding my methodologies, please contact me at blueguyzee@yahoo.com.

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