After a steady stream of discouraging news this weekend, traders woke this morning to higher gold prices and lower dollar values against the euro. European markets were already reacting to weekend developments, having dived 3% as they fell toward levels that would take the European markets down 3-6% by the end of their trading day.
A televised address by Saddam Hussein, in which he named cities under attack by coalition forces, proved one catalyst to early market declines. A close examination of the televised address soon showed abrupt camera angle changes, indicating that the address had been taped and edited. Soon Pentagon observers noted that Hussein praised Iraqi commanders who had surrendered last week without offering a fight, leading many to speculate that the address had been taped prior to the war's opening.
By the time Pentagon observers were making those remarks, market participants were learning of downed helicopters and increasing casualties in intense fighting near the southern Iraqi city of Nasiriyah. This news drove home the thought that the war might be more protracted than many had hoped. In addition, civil unrest in Nigeria added to worries about crude oil supplies, with Nigeria being the fifth largest supplier to the U.S. These worries propelled crude oil prices off their four-month lows from last week. Higher crude oil prices and a more protracted war led many to question the impact both would have on fragile economies. Market participants will have their first opportunity to study one effect tomorrow: President Bush will unveil his team's estimates of the war costs, speaking from the Pentagon. Current estimates are that the initial request will be for $70-75 billion.
Not to be exceeded by European markets, many U.S. markets achieved losses larger than 3%, too, with the Dow Jones Industrials falling 3.60%, the SPX falling 3.52%, and the COMPX falling 3.66%. Volume patterns started out negative and stayed that way throughout the day, with down volume being 19 times up volume on the NYSE and 10.75 times up volume on the Nasdaq. Total volume was 1.26 billion on the NYSE and 1.3 billion on the Nasdaq. While total volume wasn't as strong as that on the rallies last week, many market pundits say that volume confirmation is not as important on declines as it is on rallies.
What's next? Last week, a loyal reader wrote with a request that I provide an expected range for the OEX over the next month. I declined to do so last week until I had seen a pullback on the OEX. I wanted to see whether the OEX would touch the next light support and spring up again or whether it would tumble through support as easily as it had cut through resistance. Today proved that the decline would not be a shallow one with a quick bounce, but today's ending level still left some questions to be answered. It may still be too early to give a one-month prediction for the OEX, but let's see what can be determined. The first question to be asked is whether this is a bear-market rally or the beginning of a new bull rally. I wish I knew. Today's action led to a four-box reversal on the OEX P&F chart. While far from giving a new sell signal, this quick reversal does call into question the possibility that the OEX might give a high pole warning. This occurs when a column of "X's" rises above previous column by at least three boxes, which the OEX has done, and then reverses and gives back at least 50% of the rise, which the OEX has not yet done. Until the OEX reverses back into a column of "X's," however, the possibility exists. A similar potential can be discovered on the OEX hourly chart.
OEX 60-minute chart:
As those who have been reading the Market Monitor know, I've been watching a bearish rising wedge that began forming as the OEX moved off the March 12 low. As Meyers and Pring point out, bear-market rallies often take this shape, and a downside break of the formation usually results in a sharp fall. That break actually came on the 20th, but instead of the expected precipitous fall, the OEX climbed the outside the wedge. The precipitous fall came today. On the hourly chart, notice that the OEX plunge stopped just above the support level marked by the two blue lines and one green one. These lines represent important retracement levels. The top blue line marks the 50% retracement of Friday's move at 438.29. The green line marks the important 50% retracement of the October-to-December move at 437.87. That number is also almost exactly the 50% retracement of the July to August rally, so it has double significance. The lower blue line is the 38.2% retracement of the rally off the March 12 low. From looking at this hourly chart, then, we can conclude that the rising wedge was a bearish formation. We can conclude that today's drop was precipitous, but still the drop stopped just short of those important retracement levels. One theory suggests that since the rally off March 12 lows retraced a large proportion of the previous decline, the subsequent reaction might be shallow. That would suggest a 1/3 to 1/2 retracement of the recent rally before another attempt to rally. So far, then, here's what we've got: a new P&F buy signal, with a reversal down into a column of "O's" that may or may not give a high pole warning; a bearish rising wedge that's typical of bear-market rallies; a breakdown from that wedge and a precipitous drop; and a stop short of important retracement levels. Anyone noting the rise from the March 12 low would observe that the low was a higher low. What if the OEX stopped the current descent at these levels, and then moved above the January 475 high? That would produce both a higher low and a higher high on the daily chart. Would that preclude a continuation of the bear market?
Not if the Nikkei is any guide. Jonathan Levinson has often mentioned the ferocity of the Nikkei's bear-market rallies, and I decided to take a look at the recent history of the Nikkei. In November, the Nikkei rallied from 8246.53 to 9251.83 in nine trading sessions. During that sharp rally, it paused once, forming a tweezer top--a bearish candlestick pattern--with prices completely retracing the previous day's large gains, then resumed the rally. The rally began from a slightly higher low and surpassed the previous November peak, creating both a higher low and a higher high. As it climbed toward that new relative high, it gave a new P&F buy signal, predicting a new upside target. It consolidated another couple of days and then fell again, bouncing at 8300 support a few times before falling to a fresh 20-year low in March. Along the way, it gave several new P&F buy signals that also failed to achieve their targets. One of those new signals pushed the Nikkei two boxes above its bearish resistance line before that buy signal failed, too. That November rally, as fierce as it was and with all the attendant bullish signs, did not signal the end of the Nikkei's bear market.
If a bear-market rally can accomplish the Nikkei's 13% gain in nine trading sessions, achieving a higher low and a higher high, create a new P&F buy signal, and then fail, only to lead the Nikkei into new multi-year lows, we can't yet discount the possibility that our markets could do the same. So how am I going to provide that range for the loyal reader?
Let's turn to two other indices for a hint. In March, the Dow Jones Transports fell to new multi-year lows, but the Dow Jones Industrials did not. What happens when the two averages don't confirm each other? Which is right? On page 39 of TECHNICAL ANALYSIS EXPLAINED, Martin Pring asks the same question when explaining Dow theory. His conclusion is that "[s]ince it is always assumed that a trend is in existence until a reversal is proved, the conclusion should be drawn at this point that the Transportation Average is indicating the correct outcome." When would that conclusion be proved false? When both the Dow Jones Industrials and Transportation Index surpass previous peaks, giving a new Dow theory buy signal. That would require a move over 2425.75 in the Dow Jones Transportation Index along with a confirming move over December and January peaks in the Dow Jones Industrials. Pring cautions that the "movement of one average unsupported by the other can often lead to a false and misleading conclusion." He also cautions that signals can come late. Today, the transports fell more than 90 points, below 2190 support, with a bearish daily candle that hints at downside more than it does of a continued rally.
Now we have an hourly chart that offers the possibility that the recent rally was a bear-market rally, but did not fall to levels that confirm that likelihood. In the behavior of the Nikkei, we see that markets can form higher lows, create new P&F buy signals, rise to a higher relative high, and yet still continue a bear market. In the behavior of the transports, we see a lack of confirmation of the higher high shown by the industrials, along with Pring's assertion that until both make new relative highs, the presumption must remain that the transports are right and the bear market continues.
A scan of the OEX, SPX, DJI, COMPX, and SOX show all turning down from challenges of their exponential 200-dma's, with oscillators looking toppy or rolling as the failures occur at these important moving averages. Markets that appear to be turning down can turn back up, however, and the oscillators can turn up along with them. Ask anyone who tried to enter bearish trades last week on seeming breakdowns, after which the oscillators promptly redrew themselves and headed up again.
We still have no answer for the loyal reader. Let's look next at the OEX weekly chart. I'm using a log chart rather than a linear chart, because many technicians feel that a log chart is preferable when a big movement has been encompassed.
OEX Weekly Chart:
Note the descending blue line that is the long-term descending trendline. That descending trendline has not yet been crossed, which means we must conclude that the long-term trend is still down. On the linear chart, Friday's rally moved the OEX slightly above the trendline, with today's prices bringing it back below the trendline again.
On this weekly chart, note also the horizontal red lines that mark the 385-487 trading range that has marked the OEX's movements in the last months. You've seen this chart before, but within that trading range, I've also marked out a neutral wedge that's forming on the OEX. Either the range or the neutral wedge can be continuation patterns or reversal patterns. Here's the tough part. Until the OEX breaks out of that trading range, we won't know which they are.
So, here's my prediction for this month. The neutral wedge is narrowing down toward its apex. With that narrowing, I do believe the OEX will break out of that wedge within the month. This means that the wedge will not likely define a range for the OEX for the next month. A breakout in either direction might send the OEX to test the boundaries of the marked-in-red trading range in quick order, which means that the OEX should see a test of either 385 or 487 within the next month.
Which is it going to be? I don't know. Sorry, loyal reader, but the direction is not predictable with consolidation patterns. Since the OEX entered this consolidation pattern while descending, the presumption is that the pattern is a continuation pattern. Therefore, I feel safer suggesting a 487 or even a 475 (January high and location of descending trendline) high for the OEX over the next month than I do suggesting a low. My best guess at this point is that the OEX will break out of the neutral wedge to the downside and then retest the lower end of the trading range.
However, we should have better evidence as the week progresses. A move below those retracement levels shown on the OEX 60-minute chart would probably next send the OEX down to test the 50% retracement of the rally off the March low. That retracement would come at 428.30, and a failure there would probably propel the OEX down to test that lower supporting line of the neutral wedge. That may all happen this week. The alternative version--a push up through the neutral wedge and a test of the upper end of the OEX trading range and the descending trendline--is within reach this week, too.
Many of the characteristics of the OEX chart are apparent on other index charts today: bearish candlestick formations and toppy-looking oscillators on daily charts. So as not to neglect the other indices or to disappoint readers who look forward to Jeff's updates on pivot analysis, I've included calculations for daily pivots for the major indices. I note that Jeff makes his calculations from Stockcharts.com, which sometimes includes slightly different high, low, or closing figures than does Q-charts. To maintain uniformity, I've made these calculations using Stockcharts.com's information. Please check Jeff's weekend update for weekly and monthly pivots, support, and resistances, as those will not have changed. Consider verifying this information.
Please note that other quote services show differing highs for both the OEX and the SPX today. While I've utilized the Stockcharts.com numbers in the above computations, these are the computations that would result from using 890.91 and 453.66 SPX and OEX highs of the day shown by other quote services: