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Stocks Have Farther to Fall

By Jeff Clark
Tuesday, February 2, 2010

You could hear the collective sigh of relief coming from bullish traders on Wall Street yesterday.
 
After two weeks of negative action, stocks gained ground. The Dow Jones Industrial Average was up 118 points. The S&P 500 jumped 15 points. And the Nasdaq pushed forward 24.
 
It was the best day for the bulls since the market broke down from the bearish rising-wedge pattern we looked at back on January 14.
 
Any celebrations, though, are a bit premature. After a brief bounce this week, stocks will fall farther. They have to. It's the only hope the bulls have for a stronger rally later in the month.
 
I'll show you why. But first, let's take a fresh look at the 60-minute S&P 500 chart I showed you two weeks ago…
 
 
 
I forecasted the index would break the rising-wedge pattern (the blue lines in the top chart) to the downside because of the significant negative divergence in the MACD indicator (the blue line in the bottom chart).
 
MACD is a momentum indicator. Stocks were making new highs while the momentum was peaking at lower and lower levels. So the negative divergence was giving us a strong warning sign the rally could end badly.
 
It did.
 
Now, before we even start to think bullishly toward the market, we need to see positive divergence in the MACD. That's going to take a while to develop.
 
Basically, we need to see stocks and the MACD indicator turn lower again. Stocks need to make fresh new lows, below last Friday's 1,073 mark, and the MACD needs to hold above its recent low.
 
In other words, we're looking for action similar to what we saw when the market ended its modest correction back in early November (the red circle). That will set up positive divergence and give us an early warning sign of an impending rally.
 
Yesterday's bump higher was a nice gift to the bulls, and we'll probably get another day or two of strength. In fact, the S&P 500 could challenge resistance up around 1,100-1,115 or so.
 
It's way too early to expect much more than that. In fact, aggressive traders should use the strength to establish short positions in anticipation of at least one more move lower.
 
Best regards and good trading,
 
Jeff Clark




In The Daily Crux
Market Notes
Satellite radio rises from depths... Sirius XM approaches $1 per share, up 43% in January.
 
Gold retakes $1,100 per ounce.
 
ExxonMobil up off 10-month lows... oil giant sees higher prices offsetting weak demand.
 
Earnings today... Cummins, D.R. Horton, MetLife, Dow Chemical, Hershey, UPS.
Market Watch
Symbol Price
Change
52-Wk
S&P 500 1223.75 +0.1% +10.9%
Oil 37.80 -1.1% +0.8%
Gold 136.50 -1.9% +20.7%
Silver 28.08 -4.9% +57.6%
US-Dollar 79.65 +0.6% +5.2%
Euro 1.33 -0.3% -10.5%
Volatility 17.99 -0.2% -18.6%
Gold Stocks 576.48 -2.5% +25.0%
10-Year Yield 3.16 +7.5% -8.4%

World ETFs
Symbol Price
Change
52-Wk
USA 122.83 +0.1% +10.8%
Canada 30.41 -0.5% +17.1%
Russia 22.00 +0.1% +18.9%
India 38.15 +0.6% +22.5%
Israel 16.92 +1.0% +11.2%
Japan 10.56 -1.2% +6.6%
Singapore 13.66 -0.4% +18.6%
Taiwan 14.87 -0.3% +19.0%
S. Korea 57.35 +0.3% +21.8%
S. Africa 71.15 -1.5% +28.2%
China 43.99 +0.3% -1.5%
Lat.America 52.69 -1.0% +8.5%

Sector ETFs
Symbol Price
Change
52-Wk
Oil Service 134.90 -2.1% +18.0%
Big Pharma 64.04 +0.1% -2.8%
Internet 72.89 +0.4% +27.4%
Semis 16.25 +0.4% +26.6%
Utilities 30.98 -0.7% +0.2%
Defense 18.55 +0.4% +8.7%
Nanotech 10.16 +0.8% +1.6%
Alt. Energy 10.20 -0.4% -4.6%
Water 18.77 +0.8% +14.5%
Insurance 16.14 +0.4% +19.6%
Biotech 20.65 +0.4% +27.3%
Retail 19.65 +0.3% +27.0%
Software 24.83 +0.7% +24.3%
Big Tech 53.88 +0.1% +22.7%
Construction 13.30 +0.8% +16.2%
Media 13.75 +0.2% +23.7%
Consumer Svcs 67.43 +0.1% +23.1%
Financials 54.95 -0.1% +7.0%
Health Care 63.89 0.0% +1.3%
Industrials 63.79 +0.4% +19.8%
Basic Mat 74.54 -0.1% +27.5%
Real Estate 55.53 +0.3% +24.4%
Transportation 91.65 +0.3% +25.1%
Telecom 22.69 +0.2% +14.6%

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