Stock Market Update 21 January 2008

It has been another wild week on the markets with the Dow Jones World Index falling 5.1%.

There has been a lot of pain generated by this decline and a level of panic appears to be building. However, once again technical analysis has allowed me to sidestep this decline and my provident fund has made money over the past month.

For those that have shadowed my moves and are currently positioned in cash and/or bonds, this is starting to look like a delicious opportunity to buy some very cheap equites soon. For those who employ financial advisors; I hope they had you safely on the sidelines for this move (as they should have). If not, you need to consider whether they are worth having.


First chart is the DJW daily line chart (click on charts to enlarge):



As can be seen, price has declined rapidly through the downtrending channel and is now very near the lows seen in Mar/2007. Those that stayed with stocks have lost all their gains for the last year in a very short period of time. This is the violence of bear markets; when they move they move very, very fast.

There is no indication on this chart that the declines have ended. A break of the support level from Mar/07 @ 270.73 is it's last hope.


Next chart is the 1 box PNF:



This chart gave us the sell signal on a break of price below 294.

It is clear that previous support at 278 was broken easily. Next support is at 271 (right where we are at now). Below that we look to 264......below that down to 232.

Note the chart has "auto aligned" projected price targets several times over the past 2 weeks (downwards) due to the momentum and currently projects a target of 243.

Once again, for those who are new to charts, do not in any way use this as a trading target. Many times the price action will either exceed the target or fall short of the target. I use the projected price as merely an indication of the strength of the current move. A target near to current price shows me the move is shallow; a price far from current prices (as it is now) shows me there is considerable downside risk remaining.


Next chart is the PNF Traditional chart:



It can be seen on this chart that a price print of 292 was the sell signal (as I pointed out previous). As I said, when you have a multi-year buy signal that turns to a sell signal.......you listen. I did and that saved me thousands of dollars over the past 2 weeks.

It can be seen on this chart that the revised projected price is 240. It can also be seen that previous levels of support/resistance were at 264, 232 and 196. These are the current levels we should be thinking about in this bear market. Not saying they will go right to them but they give you an idea of the downside risk.


Next chart is the 10 year weekly line chart:



As I blogged several days ago, when the 13 week moving average crossed below the 34 week moving average (combined with the MACD descending below the zero line), it was the signal to move my last 25% out of equities.

Once again, the last time the 13 crossed the 34 was in April, 2003 and signaled the beginning of the bull market. As per the PNF traditional chart; when a multi-year buy signal is reversed you pay very close attention.

Also note the well defined upchannel from 2003 has now been decisively broken. This is very worrying if you are still in equities.

This chart now tells us we are in a bear market and, while there will be bounces along the way, any rally should be sold into rather than bought.



Bottom Line:

As I blogged previous, I am currently positioned as follows:

Fidelity International Bond Fund-50%
U.S. dollar cash fund-25%
Euro cash fund-25%

For those that have shadowed my moves, we sit today in a very comfortable (and profitable) position waiting for the carnage to complete and looking to move back into equities when the time is right and the price is cheap.

To be honest, I would have liked to see this decline move at a much more orderly pace but, as I said at the open, bear markets tend to be vicious.

The question now becomes when I will look to buy back in. As I have said previous, those that tell you they can pick tops and bottoms are nothing more than liars.

There are those who are buying now as the price is cheap. This is known as trying to "catch a falling knife"........sometimes you catch it right but most times you lose fingers! Not what you want to do with pension funds.

What I can say with certainty is this move has left the market in an extremely oversold condition. There are several indicators I use (not shown) that have extremely low values that I HAVE NEVER SEEN IN 10 YEARS! That tells me the market has over-reacted and we are very close to a "bottom".

I use the term bottom in quotes for a reason. When price reverses, there is a tendency for many to jump in and try to "buy the bottom" on the first price reversal. Note that technically price does not normally bounce off a bottom in a "V" shape (though it does happen on occasion). Normally what happens is buying occurs and price advances to a certain level. The dumb money sees the increase and rushes in to buy while the smart money "sells the rally". This is known as a "dead cat bounce" and generally the markets will come back down to retest the previous low. It is usually when price retests the low (or very close to it) and then reverses higher a second time that it is a safe bet the trend is reversing.

I will use the charts and they will tell me when the time is right. But just to give you some idea of how pesimistic the markets are currently, I have included the Bullish Percent Index for the Nasdaq, S&P 500 and NYSE. These charts tell you the percentage of stocks within the index that are currenly on a "buy" signal on their PNF chart.

Note the levels are at their lowest levels since 2003 (or in some cases actually below 2003). That tells me we are getting near to a bottom.