MAILBAG QUESTION:

"how do you read the market here? i've seen some major tops in the fall period over the years, but Nasdaq doesn't look like it's going down much."

MY RESPONSE:

Well, it's kind of scary when you couple the projections about what a huge negative economic impact a Government default might have with the tendency for major tops to be made in the Sept-Nov timeframe; couple these aspects with the overbought extreme seen with the monthly Relative Strength Index (RSI) and it could be a frightful bad-witch Halloween season.

I'm not going to predict any dire developments because that is NOT warranted by what is seen technically at present. However, long-term charts and the long-term RSI suggest the kind of chart and RSI pattern that could be a 'set up' or precursor to a major bear correction. 'Bear' with me here as I go though first daily, then monthly charts; I imagine you at most look at weekly charts. Why would we go beyond that as options traders! Monthly charts are what Charles Dow would have looked at in his day, in terms of assessing whether the U.S. was in a bull or bear market.

We heard talk today that the S&P 500 (SPX) Index was trading below key support at 1680 and that was bringing in selling; among other factors no doubt! I find that the first sign of a bullish or bearish move in one of the major indexes is the piercing of, or rising above, the 21-day moving average. Today (10/3/13) was the second daily Close below this key trading average in SPX. Next up as a key support is the support (up) trendline, currently intersecting in the 1660 area. We then have a cluster of prior downswing lows in the 1630 area. Piercing 1630 on a closing basis, over a sustained period, turns the intermediate trend lower.

The pattern of the two upward sloping trendlines slightly takes on the appearance of a possible rising bearish wedge. This pattern isn't exactly established but a further on chart will show this kind of 'wedge' pattern.

A key next bearish development (the first was the retreat from the upper trendline and the accompanying 'overbought' RSI extreme) here would be the decisive downside penetration of SPX's up trendline. Stay tuned on this possibility. I should also mention that TODAY brought a first recent Close below SPX's key 50-day moving average which adds to bearish perceptions.

ANOTHER FACTOR - 'TOO MUCH' BULLISHNESS

Given the retreat we've been seeing in the S&P, more so in the Dow 30 (not shown), there have been 'too many' upward spikes in my CPRATIO indicator seen above, suggesting strong bullish sentiment or a stronger bullish outlook than I think warranted given potential dangers to our economy ahead. This suggests a kind of 'over-optimism' in terms of the S&P and Dow. A solidly bullish stance might be warranted by the strong Nasdaq market that continues to look like it could charge ahead even in the face of a weak Dow/S&P and I'll look at that shortly.

I especially notice a couple of things with the MONTHLY SPX chart shown next: 1.) That the major tops for the multiyear period shown below occurred in the September-October timeframe. 2.) These tops were accompanied by overbought (i.e., high) extremes in the 13-month Relative Strength Index (RSI). Major bottoms were associated with corresponding inverse or low readings on the RSI.

I associate the cyclical possibility of a major top with a scenario that could crash our economy. It is of interest or worrisome that there is such a scenario out there given the possibility, maybe a high one, of a US Government debt default.

THE NASDAQ - WILL IT GO UP 'FOREVER'!

Looking at the Nasdaq Composite (COMP) daily chart we see a very different chart picture. At most, COMP has slowed in its upward momentum on reaching the upper end of its well-defined uptrend price channel. Given the high ('overbought' type) RSI reading, it seems unlikely that COMP would break out above its broad uptrend channel but a more or less sideways move will tend to 'throw off' its overbought condition.

To date COMP has not recently fallen even below its 21-day moving average, which looks quite bullish in the face of weakness in mainstream NYSE stocks. How could you not be bullish on the Nasdaq given how well the tech stocks are holding up. Gee, as soon as this government stuff blows over and reasonable men agree on reasonable action, it will be off to the races again with tech. That may be what happens, but what's intrigued me in the way a coiled rattlesnake did along a hiking trail I was on recently, is the chart that follows the daily COMP chart.

I mentioned that it's rare even I look at monthly charts but I do look at them occasionally as a student of long market cycles, as well as short market cycles.

I often see retracements of major prior moves of around 2/3rds or 66%, where a move will often stop and counter-trend move began. I was curious as to how much of the major bear market decline of 2000-2002 had been retraced and was surprised that it has to date been approximately 66%.

This tendency for counter-trend moves at or near the 66% retracement mark is coupled with some other chart/indicator aspects of interest. A strong chart pattern aspect to the very long-term monthly chart is the rising wedge pattern traced out by two up trendlines that have converged over time. A rising wedge is typically a bearish pattern. It shows a kind of price 'compression' as the up and down moves don't carry as far as previously. When the trend gets out to the 'apex' of such a 'wedge' or out near the converging end point, a downside reversal is common at or near narrowed converging trendlines.

The other strong association with some major tops and major bottoms is that the 13-month Relative Strength Index will get up into a 'typical' overbought zone around 70; or, conversely, down to a low point around 30 in the case of a very oversold index.

So, while COMP doesn't act like it will ever come down or down by much, the major indexes always act like this at major tops. Some key technical aspects are: COMP is 1.) at resistance implied by the upper trendline, 2.) has retraced 66% of a major prior bear market (and could reverse after completing this much of a retracement) and 3.) is at a major overbought extreme on a multiyear basis.

My speculation on the Nasdaq above is just that; a 'speculation' of a possible major bearish 'event' and all those in the know on this subject say don't mess with the 'full faith and credit' of the US or suffer potential dire consequences. The kind of bearish reversal that is possibly 'suggested' by the foregoing chart and indicator considerations would have to be something BIG; a 9/11 type terrorist attack, a shut down of the global economy, etc. The stage is set, but what play we see is unknown yet but there are some troubling signs of something big that the charts and indicators would indicate or 'support' so to speak.


GOOD TRADING SUCCESS!