Next Two Weeks Critical For the Market (SPX, DJIA, NASDAQ)
Having suffered through a miserable 2008, investors glancing at the first three weeks of 2009 want to shield their eyes. Many markets have fallen over 10% thus far and the old problems of last year are reasserting themselves. People calling for a bottom and new bull market have been frustrated as violent prices swings evaporate wealth.
I have often discussed in my Weekly Newsletter EPIC Insights that we must trade within the primary trend. If the primary trend is bearish, prices are destined to fall. Granted, there can be powerful bull market moves within a bear market. However, more money is lost chasing bear market rallies so we must remain skeptical of any bull move that occurs within a primary bear market.
Knowing this, we must assess the primary trend and only become more aggressive buyers when the trend has changed. With that goal, this table holds the key to the future:
|
Index |
Prior Low |
Date of Low |
Recent Low |
Date of Low |
New Low? |
|||||
| Dow Jones Industrial |
7,552 |
11/20/2008 |
7,979 |
1/20/2009 |
No |
|||||
| Dow Jones Transport |
2,989 |
11/20/2008 |
2,959 |
1/20/2009 |
Yes |
|||||
| NASDAQ |
1,316 |
11/20/2008 |
1,440 |
1/20/2009 |
No |
|||||
| S&P 500 |
752 |
11/20/2008 |
805 |
1/20/2009 |
No |
|||||
| Wilshire 5000 |
7,451 |
11/20/2008 |
8,100 |
1/20/2009 |
No |
|||||
| FTSE 100 |
3,781 |
11/21/2008 |
4,001 |
1/23/2009 |
No |
|||||
| DAX Index |
4,127 |
11/21/2008 |
4,139 |
1/23/2009 |
No |
|||||
| CAC 40 |
2,881 |
11/21/2008 |
2,823 |
1/23/2009 |
Yes |
When US and European markets hit new lows in November 2008, all the lows were synchronized. This created a bearish confirmation as each market reinforced the themes of the other.
Currently, we see many of these markets speeding toward recent lows in the same synchronized manner. However, only the Dow Transports and CAC 40 have violated the prior bear market lows. This sets the stage for a potential bullish non-confirmation. If most markets refuse to confirm the breakdowns of the Transports and CAC, and begin moving higher, the stage could be set for a reversal of the primary trend.
Whether the market can act in such a manner remains to be seen. However, there is one thing we know for certain. Over the next two weeks we will see either all markets breaking to new lows (would confirm the bearish primary trend) or certain markets holding strong and pushing above their January peaks (indicates the primary trend has turned bullish).
The outcomes are of immense importance as a bearish breakdown raises the prospects of a dramatic collapse in stock prices and economic activity while a move higher indicates higher stock prices and economic recovery.
Sean Hannon, CFA, CFP is a professional fund manager and weekly contributor for StockTradingToGo.com. He runs EPIC Insights Weekly (subscribe) the free Sunday market newsletter, and is the founder of EPIC Advisors, LLC.
