Super Chart Signals Waning of Bear Market

Moneynews ^ | March 27,2008 | Max Whitmore ( The Chartist)

[SeekAndFind]

Well, here we are nearly 10 days post-Bear Stearns, and the markets are still very tenuous. We have yet to break decisively above major resistance on the Dow Industrials or the S&P 500, according to my Super Chart Keylines. Granted, we have broken above what is called the near-term resistance, but the major resistance levels are still higher on both charts. We are, however, closer to resistance levels on the Dow than the S&P.

We have to ask what the charts are telling us at this point in order to get some clearer sense of what to expect and do next. To help me in that regard, I am including the Super Charts for both the Dow and the S&P to illustrate my conclusions about this crucial point in the stock market's unfolding saga.

First, let's look at the weekly S&P 500 cash index Super Chart.



You will note, of course, that we are still well below the Super Chart Keyline, which currently stands at about 1415. That said, we are still in a bear market as far as this chart is concerned. However, the important action on this chart is seen in two places.

First, the Key Support Line was clearly crossed down during the week of March 7. Typically, I would expect that this very important down action would have been followed by several weeks of further slightly down or sideways action and then, I would expect a pullback to the Key Support Line to test it as the new resistance.

However, due to the Fed's very decisive action in the Bear Stearns matter, there was a sharp move back to the Key Support Line immediately. This is a very unusual development, indicating that the bears had, for the first time in some months, not called the shots. Even more disturbing to the bears is the fact that currently the closing price on this week's chart is above the Key Support Line.

I don't often see a development such as this. If such a cross-up does happen, it is usually after a period of four to six weeks at the earliest, not early in the second week. However, while this is a positive move for the bulls and a worrisome one for the bears, the bears are still in the cat-bird seat because we obviously remain well below the Super Chart Keyline at 1415 — still well into bear territory.

The second important part of this Super Chart is the section at the bottom of the chart. This section is called the "stochastic" portion of the chart and shows the general "momentum" of the move seen in the price portion of the chart above it. The red line is the slow stochastic line and the yellow is the faster. Generally, as long as the yellow is below the red, the overall momentum is down, which confirms the downtrend of the price chart above it.

However, the major activity on the stochastic portion of the Super Chart is now occurring below the 30 level, indicating that the downward momentum is clearly beginning to run out of steam. This is an important indication that the bears are in much more trouble at the moment than the Keyline might indicate. If the bears plan to remain in control, they need the momentum on their side. Clearly, that is not the case right now.

And when we do get a cross above the slow red stochastic line by the faster yellow stochastic line, in my estimation, we would have a signal that the end of the major bear move was at hand and it is time to begin to do some major buying for the next bull move. We are not there yet, but it can be seen that we are definitely building a bottom in the stock market here and need to be alert.

I would say that the S&P chart is saying that 85 percent of the bear move appears to be over at this point. I would estimate from the picture the chart is showing that we have at least several months or more before we try to actually cross above the Keyline, but I am closely watching for the early buy signal the stochastic crossing event may offer.

So much for the S&P 500 cash index, let's look at the weekly Dow Industrials chart.



You will recall from my first column in March (see my archive at MoneyNews.com if you need to review that column) that I showed you a substantial down "head and shoulders" formation that had set up on the Dow Industrials. At the time, we had not seen the key action of breaking down through the "neckline" of the formation to confirm its potential to take us to as low as the Dow 10,100, the eventual target indicated if we did cross down the neckline.

But shortly after my early March column, just like the S&P, the Dow did cross down its key neckline support during the week of March 7. I was impressed that both charts broke support at the same time, even though I mentioned at the time that the S&P was not supporting the Dow's formation with its own "head and shoulders" formation and that this non-support did reduce the overall impact of the Dow formation a bit.

But, like the S&P, the Dow has also reversed its down move because of the Fed action and not only crossed back up through the "neckline" — a very unusual move so quickly after its initial breakdown — but it is almost pulled back up to the all important Super Chart Keyline at Dow 12,592.

Now, remember, I have told you I do not call my Major Market Turnaround (MMT) from the Dow, as the Dow crossovers tend to be much less dependable as definitive signals. This is due to the limited number of stocks represented (just 30) and the fact that big money will use the Dow as a trading vehicle day-to-day while it may at the same time avoid the broader market (the S&P stocks) until it is solidly convinced that there is a confirmed trend underway.

Anyway, the fact that we have pulled back up to the Dow Keyline at the moment and have also crossed back up the "neckline" again tells us that the bears have a lot to worry about at this point. Even the lower part of the chart, the stochastic, is strongly supporting the S&P's stochastic condition, showing a clear slowing momentum condition. I would not want to be a bear with a heavy short position just now.

So, where are we with all this? Well, clearly the bulls are gathering their forces and handing the bears some defeats in here. The sharp reversal of the cross-down of the major supports on both the S&P and the Dow plus the slowing momentum of the stochastic says that the bears are continuing to lose control here. But, until the S&P Keyline is crossed and closes for six consecutive weeks above the Keyline, we do not have a Major Market Turnaround.

Be assured that when the fast yellow stochastic crosses up the slow red on both the S&P and Dow, I will let you know at once. This will be the signal to begin using cash to buy some of the more bargain-priced large-cap stocks, as I said earlier. They will be the first to feel the long-term benefits of the Major Market Turnaround.

In any case, there is progress toward a bottom being built in the major indexes and clear signs that the bears are in a lot of trouble. True, we are not there yet, but I would guess that two to three months more and decisive bull moves will begin to unfold. We shall see.

Well, that‘s my latest chart updates. It surely has been an event-filled seven to eight months, and the next two to three months promise to be packed with just as much action. So, stay tuned!

[proxy_user]

I see a clearly formed head and shoulder, so I would recommend Proctor and Gamble.

[KoRn]

ROFL!!!

Charts and graphs just make my eyes glaze over. I would never make it in management....

[modican]

I hope this Superchart, gives me a lot of Supermoney, so I can afford a lot of Super Gasoline (Premium) and maybe I can buy one of these Super prised houses.

[ThePythonicCow]

My guess is that the Plunge Protection Team orchestrated this apparently unusual rebound in the market, doing the best they could to paint a picture to the chartists that this was a bottom.

I remain bearish, though would not be surprised by a few months of bullish teasing from the market, before we take the next step down. The bear is hungry, but first must taunt some more fools into its cave, in preparation for its next meal.

Other than some employees and stock holders of Bear Stearns, and some folks who are getting foreclosed on mortgages that for the most part they shouldn't have held to begin with, we really have not yet had the moment of shear panic and terror, followed by the months of depressed gloom, that it takes to form a solid bottom.

We have not yet begun to digest most of the enormous losses that this collapsing finance bubble has generated.

[Constitution Day]

Super Chart Signals Waning of Bear Market

I trust that this means that overwrought rumors of our imminent demise are patently false.

[george76]

Dead cat bounce

[webstersII]

ping

[martin_fierro]

[Cringing Negativism Network]

What we need to do right now, is further devalue our dollar, and ship more jobs overseas.

After all, it’s worked so well thus far...

[cherry]

the problem for bears and other forest animals scurrying about for subsistance, is that where the heck do you put your money if all you can get from cd's is about 3%.....for the many people without defined pensions, we need a better return, in a safe manner.....

seems that you have to be a rabid speculator to win in the stock market....slow and steady doesn't cut it....

[rolling_stone]

Dead cat bounce

I think the bear is just taking a nap after consuming the dead cat bounce and is slowly getting ready to wake up and go fishing for the trout on the bottom. Lower highs, lower lows, still trending down, no real pain yet! Financials still going down despite Uncle Sugar giving them large early Christmas presents. I don't see bulls in the pasture, I think they are in church praying. I'm betting on QID, SKF for now. FXF longer term but may retrace a little now.

[george76]

Socialist Obama wants to double the tax rates if elected...so the markets will be very afraid , at least, until November.

[politicket]

Here's my SuperAnalysis of the SuperChart:

The "boys" on Wall Street know that the ca-ca is about to hit the fan in the coming months.

Therefore, they need to generate renewed interest in the market in order to transfer out of their many dangerous positions.

It would be interesting to see an analysis of what positions the major players have been taking in recent weeks. My analysis is that they are primarily "sell" orders.

The market isn't getting better anytime soon - and it has nothing to do with the current political race, even though many Freepers want to call people like me "Doom and Gloom"-ers.

I went to cash in November and will continue that way until Summer at the very earliest - and most likely the Fall (except for possibly a few small stakes day trades here and there).