Stock Market Update 04 February 2008

Since my last update the markets have functioned in exactly the manner I anticipated (sorry for any spelling mistakes as the blog site will not spell check due to the slow internet in DXB associated with the cable cuts over the past few days).

The steep sell off was followed by a "dead cat bounce" retracement due to the exteme oversold condition. While I was able to profit from this in my personal trading account, the Provident Fund does not allow the sort of in-and-out trading needed to take advantage of these short term opportunities. As such, my comments here will continue to be associated with the more medium to long term perspective.

The question is where do we go from here?

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



Firstly, I want to reiterate the sell signal on this chart was initiated in early November based upon the following:

1) the price dropped below the 50 day moving average (blue line)
2) the ADX (14) red line crossing above 60, and
3) the MACD crossed below zero

Since then nothing has changed. We are still on a short term sell signal and we are in a downtrending market.


As can be seen, the market has clearly set an interim low at 262.38. Using the high and the current interim low, I have drawn a Fibonacci retracement.

In a "normal" market, it is common to retrace price movements by 38.2%, 50%, or 61.8% of the initial price movement; these are know as Fibonacci retracements levels (the concept of Fibonacci numbers is commonly used in Elliot Wave Analysis; for those that are interested here is probably more than you would ever want to know about Fibonacci numbers):


http://www.mcs.surrey.ac.uk/Personal/R.Knott/Fibonacci/fibnat.html


http://www.weboma.com/how-to-use-fibonacci-numbers-in-forex-and-stock-trading/


It is important to reiterate there is no one "magic answer" when it comes to technical analysis. No single indicator will ever provide the entire answer to what is potentially the most complex enigma there is; the world's stock market. As such, technical analysis is as much an art as it is a science.


I have learned this lesson over the years and that is why the charts I provide are designed to give you the "general view" from the most short term to the most long term. When they are all in alignment "up"......I am bullish. When they are all in alignment "down"..........I am bearish. When they are "mixed"........I am neutral. Currently all of them are down.


Unto themselves, Fibonacci numbers provide some idea as to possible support or resistance levels but should not be relied upon to provide the complete picture. But like any other technical indicator, when combined with other technical indicators they tend to be much more powerful.


Note this market has yet to even surpass the 38.2% retracement level (284.52)......this would be the first level that we might expect a turn back down. If this happens at such a low Fib level, it signifies a very weak market as a much more common retracement would occur at the 50% level (291.35). Note this level is also very close to the declining 50 day moving average (currently at 292.03) so we could assume the "ceiling" of this countertrend up move will occur somewhere near this level (around 291-292). A break upward through there would be bullish and would tell us the market may have put in at least a mid term low.


Next chart is the 1 box PNF:


The sell signal on this chart occured on a price print of 293. It is still bearish and projects a price target of 223 (note to new subscribers; please read previous blogs on how to interpret these projections).


Next chart is the Traditional PNF:


Again, the sell signal occured on a price print of 292. This chart projects a target of 216.


Next chart is the weekly DJW line chart:


The trend has clearly broken the uptrend from 2003. The 13 week moving average crossed below the 34 week moving average. The MACD has clearly broken below zero. This chart could not be any more clear.........BEARISH.


Next chart is the monthly DJW candlestick chart:


Once again, it is very clear. We had 6 attempts at closing below the 12 month moving average since 2003. All of them failed and we went on to new highs. January/2007 is the first close below the moving average. It cannot be more clear............BEARISH.


BOTTOM LINE:

As indicate in previous posts, I am now positioned as follows:

50% Fidelity International Bonds
25% U.S. Cash
25% Euro Cash

I am still looking for the opportunity to move back into equites when the time is right but this is not the time. In my opinion, this current rally will fail and we will come down to at least test the recent lows.


For those that are positioned in line with my holdings...........keep your powder dry and wait for what will be great buying opportunity sometime soon.


For those that are still long the markets (this is probably those who have recently subscribed to this site).....the market is providing you with what I believe is a second chance to get out. You may want to seriously consider it's very generous offer.


As always; I am not providing any individual advice as I am not under retainer to do so. Please undertake any postions at your own risk.