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Bearish Fundamentals, Bullish Technicals

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I got a couple of e-mailed questions today about what I saw as the most bullish technical chart/indicator patterns that might be forecasting something different than the current bearish fundamentals.

Well, I have to admit that in my last (weekend) Index Trader column I wrote that the market could go higher as the trend remained bullish on a short to intermediate-term basis, but was cautious about thinking that the major indexes were going to go a LOT higher. I find even in myself, as technically oriented as I am, that it's HARD to ignore the relentless week to week bearish news on the economy; e.g., poor home sales, job creations slowdown, very negative consumer sentiment survey results, etc.

However, if I JUST kept my attention on technical (analysis) aspects, bullish patterns include:

1.) Some long-term bullish chart considerations
2.) Formation of two common chart bottom patterns
3.) The last bearish sentiment extreme occurring around the start of the last up 'leg'
4.) Long-term weekly Dow theory chart patterns involving the Dow 30 (INDU) and the Dow Transports (TRAN)

# 1 - Bullish long-term chart considerations

Something that doesn't look so impressive until several weeks into a rebound, but the S&P 500 (SPX) long-term weekly chart has had a good-sized rally off the low end of its multiyear uptrend channel. Long-term charts like this are often the most telling when using a close-only line chart like this one.

The fact that SPX has held an up trendline like this and did NOT fall to below its prior 2006 low (at 1228), does suggest (HARD TO BELIEVE!) that this market remains within a long-term uptrend. Maybe there is major truth in all that conventional 'wisdom' out there that says that stocks are a major place to be invested if judged based on a 5-year timeframe.

Within the Nasdaq, I tend to look at the Nasdaq 100 (NDX) index as best showing the long-term weekly chart pattern for this market. With NDX the index has held its long-term up trendline also (and its trendline is even better 'defined' than SPX) and is having a very healthy rebound off its last low.

Also, the last weekly closing low, as with SPX, was also associated with a major oversold reading on the 13-week Relative Strength Index (RSI) indicator.

# 2 - Two common chart bottom patterns

There are three common bottoming formations: a Head and Shoulders type bottom, a 'W' and 'V' bottoms.

With SPX, the pattern is a "W" bottom pattern, even though the two legs ending in the low end of the 'W' formation are not exact double bottom lows, but they're close and the pattern clearly forms a W.

In the case of NDX, a line chart shows the 'V' bottom pattern most clearly. V-bottoms are more common than 'V' type tops as, unlike what is seen in the commodities markets, there is rarely a spike top the way that a final low can happen quickly at emotionally driven panic bottoms in the stock market.

# 3 - Last bearish extreme in 'sentiment' - predictor of the most recent advance

If we only focused on the last sentiment extreme 'signal' in my 'CPRATIO' indicator, seen at the lower portion of the S&P 100 (OEX) chart below, the market is still 'acting on', so to speak, the last 'buy signal' provided by the oversold extreme of high bearish expectations.

Apparently, investors and traders forgot to look at the OEX daily chart pattern, as the 610 low HELD the area of its prior low in that area. Hey, a double bottom low like that is a BULLISH pattern!

# 4 - Some Dow Theory considerations

Dow theory, as formulated 100+ years ago and still proving its value today and looks at the stocks that manufacture the goods (the Dow 30 Industrials) and at the biggest companies that ship those goods (the 20 Dow Transportation stocks: symbol TRAN).

If shipping slows, this will tend to show up in the TRAN average and it will top out first or simply not follow the INDU to a new high, which was the case in October of last year, when the Dow went to a new closing high, whereas TRAN was languishing well below its prior high. A 'diverging' pattern like this can forecast a recession and I would say this Dow Theory sell signal did a good forecasting job.

Conversely, the way that TRAN has been on an upward tear has not been widely reported, but TRAN could even be headed to a new weekly closing high. Today's close, with tomorrow yet to determine how the average will close out this week, is getting rapidly near to its all time weekly closing high. High fuel costs or not, something is happening here. Maybe, TRAN stocks are not doing as badly as you would think from the current negative economic news and savvy investors might be seeing/forecasting a TRAN earnings pick up later this year.

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GOOD TRADING SUCCESS!
 

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