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Today's WrapUp by Ike Iossif 02.24.2004 Mon Tue Wed Thu Fri Archive |
"February Monthly Report"
Last month, on 1-17-04, I said: "... At the moment, according to all of the indicators that we follow, the markets are at most 2%-3% away from either a short or an intermediate term top unless they go vertical, which can easily happen...Since the bottom in October of 2002, every time the 10 day trading oscillator got up to present levels, NASDAQ experienced a pullback between 3% and 5%. So, I would imagine, that at the very least we ought to expect a similar pullback coming from the 2160-2190 zone."
It turned out that our 10 day trading oscillator was right on the money. NASDAQ got as high as 2154, and then it rolled over and it hasn't looked back since. From its top of 2154 to its bottom of 2012, it pulled back 142 points, or 6.6%. Is this the end of the pullback, or is there more to come? Let's take a look at the chart.
First of all, we ought to acknowledge that NASDAQ has yet to violate inner channel support. Notice that the green line has been tested five times, and every time it has held. Moreover, even if the inner channel support line is violated, there is still outer channel support at 1970, and even at 1925. So NASDAQ can fall another 113 points, or 5.5%, and still stay within its upward rising channel. My point is this, we can have an additional 5.5% decline, but the intermediate term up-trend will remain intact. It will take a close below 1925 for the bears to claim victory. Assuming that the overall character of the markets remains bullish, and the intensity of demand for speculative stocks remains the same, then we ought to see NASDAQ bottoming between current levels and 2000. Not only 2000 was the break-out level, but also the Andrews Pitch Fork points to it, and there is a support line from the October and December lows. If the intensity of demand for speculative stocks has abated somehow, but the overall character of the markets remains bullish, then we may see an additional decline up to 5.0%-5.5% before it turns back up again.
Moreover, as I already pointed out, NASDAQ is still in an up-trend. At the same time, the NYSE, DOW, SP500, SP100, and Mid-Caps haven't even made contact with channel support. Thus, we have to assume that the bullish character of the market is still intact.
The SP500, for example, is in a well defined rising channel indicated by the two green lines "1" and "3." It could fall all the way to 1090, and the intermediate term up-trend will still be intact. At the moment, it is trading in the upper chamber of the channel, and it has not even challenged the support line from the March '03, and November '03 lows (red line "4"). At the same time the McClellan Oscillator is already in the -50 area. So far, the action is quite similar with what we witnessed between June '03 and August '03. Of course, the SP is 200 points higher since its August '03 lows, and there has been an excess of $200b already invested in equities the last seven months. Nevertheless, the point is this: from its highs of 1015 in June of '03, the SP pulled back 55 points, or 5.4% to 960 by early August. Likewise, the SP can pullback another 5.4% from its recent high of 1159 to 1096 for a total of 63 points, and it will still be in an up-trend.
Chart courtesy of Carl Swenlin and decisionpoint.com 
Let's take a look at another chart that illustrates similar behavior. The chart below illustrates whether the underlying index is closing on a daily basis near its lows or near its highs for the day. What we are looking for is confirmation. During rallies we would expect the index to close consistently near its highs, while during declines, we would expect the index to close consistently near its lows. Notice the almost identical action both by price and by the indicator between the last 5 weeks, and the period between June 17th and July 16th of '03.
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In conclusion, so far the decline that we have had the past few weeks is quite similar to the ones we have seen during the past 12 months. Moreover, the indices can decline another 5%-5.5%, and the up-trend will still be intact. It will take a decline in excess of 6% for the bears to be able to argue that the bear market is making a come back.
Ike Iossif
All charts are property of Aegean Capital Group, Inc. All Rights Reserved, Reproduction without written permission is strictly prohibited.
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Copyright © 2004 All rights reserved. Ike Iossif
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