That Sinking Feeling: Stocks Stuck South of 200 DMA

The S&P has closed below the 200 day moving average (DMA), a widely-watched indicator, for 11 straight days. This is now moving into the length seen at the top in 2007: 19 days below in Nov 2007 (the first dip below the redline in the chart). It stayed well below in 2008 with a slight blip up in the Spring. Is the extended period below signaling another bad year ahead? 

The WSJ has picked up on this, noting that "some pretty smart people are cautious". Specifically, John Hussman has noted that only 19 times in the past 50 years have technical indicators been this bad, and they signaled a further plunge of 7 - 20% over the next year. Worse to consider is that bear markets tend to run for two decades (eg 1929-1949, or 1966-1982), and this one has only gone for one decade so far. If the Hope Rally is done, we have a decade of hurt ahead. 

Richard Shaw of QVM has a nice analysis (the charts are from him) which points to the 200 DMA level as now becoming resistance. A close look of the past few months shows how the market has bumped along the 200 DMA:

 

Doug Short adds this compendium of global markets, all sharply down, with the Shanghai Index already into bear market territory (26% off the Nov-Aug bounce peak):

 

Many investors follow fairly straightforward metrics (PE ratios, earnings growth, 200 DMA). A look into their way of thinking is a good way to predict how they are about to react. Here is a another chart from Doug which shows another widely watched indicator: will we close below the Feb5 low on a weekly basis (smoothing out intraday spikes)? We are sitting right on that level, and this time we are below the 200 DMA, setting up a much deeper drop:
 
   

The next two signals (if we drop next week) that will be widely watched are the 20% "bear market" drop and the "Death Cross" where the 50 DMA runs below the 200 DMA. Here is a look back at the 50/200 DMA crosses since the 2002 bottom:

 

Finally, we got the first-of-the-month signal of Daryl Montgomery mentioned in my June Swoon post of last week: the first four days of June were down, for a double-down month in a row. His comments:

Even worse was that all four major indices were down for the first four trading days of the month. This is a typical bear market pattern. It does occasionally happen in bull market rallies though, so to be significant there needs to be two months in a row with a loss in the first four trading days. May also saw just such a loss, so the two down months in a row have now taken place. A bear market doesn't mean the market isn't going to go up again. Bear markets are known for their sharp and sudden short covering rallies. Traditionally, it means that traders should switch to shorting the rallies instead of buying the dips. 

So far we have a wealth of worry but no clear direction, although odds favor a down week if not a down Monday. Futures are down as this goes to press, albeit this often misleads by the morning open. Asian markets are red across the board, but they tend to follow not lead, so view this as a reaction to US markets on Friday. Can wave theory provide more precise guidance?

Neely notes that despite the "scary, news-induced sell-off" the market has not even retraced 50% off the low of eight days ago, and so he expects a bounce. Kenny notes that we had a lot of overlapping waves on Friday, not typical for an impulse wave down to the depths. The way this gets squared is to count the whole drop as a five-wave leading diagonal (LD), where wave compression and overlapping minute waves can be expected. If so, the downside target is around Sp970-1000. (For those of you who follow the comments, I discussed this several times over the past few days, including here.)  MarketThoughts provides a good discussion of this LD view, which he sets up with this chart:

 

Under this view, the Flash Crash was a wave 1, the Flash Bounce a wave 2, the Retest Wave 3 and the meager 38% retrace last week a wave 4. This satisfies Neely's concern, since wave 4's tend to retrace 38-50% while wave 2's usually go back 50-62%. Here is the LD count and predicted drop (just don't be distracted by the grey fib retracements, as they are not off the start of wave 1 but of wave 3):

 

The third view (after Neely's triangle with upside this week & the LD count) is the nested 1-2. This is the prime count of EWI and was reiterated in the Friday STU. They begin with the S&P futures, which hit Es1107 in overnight trading, a perfect 50% retrace of the prior wave down (from the Flash Bounce high), and also 38% in their alt count, which makes what is labeled a blue 3 in the prior chart the end of wave 1 down. Both reflect minimum and satisfactory retracements, setting up a deep plunge. Also, in their nested 1-2s, the inside 2 remains shorter in distance and time of the prior 2, a proper relationship. This chart from EWPrinciple captures this nested 1-2 view:

 

Interesting is that the STU also caveats their bearish count: the TRIN on Friday was the third highest in 22 years, behind the October 1987 crash and a warning drop in Feb 2007. This might signal a momentary bearish exhaustion. Last week (Wed) they had expected a higher retracement for their alt count, which I called the Big Tease. It could still be on, especially with a bounce Monday. 

After all these points of view, we are left a bit adrift. Sometimes that is the best you can do. If we pull back, however, it is clear a fundamental shift has occurred. EvilSpeculator provides a very interesting sets of charts in their private section for subscribers, which they have allowed me to publish in part. They have graciously allowed me access to their private service, which I have found quite interesting as a complement to EWI and NEoWave. The final chart and analysis is a good exemplar of why - they are pushing the envelope on TA. 

This chart looks at the percent of stocks above their 50 DMA. It gives an advanced warning of divergences. In this case the percent above peaked around Nov and pointed to the Jan drop ahead of time; then bounced to a lower high and have fallen with the market since. The early warning is key. It shows how the fundamentals in the market have been turning over, and pointing to a coming distribution (meaning: big drop). A similar signal was given in early 2007. 

Comments

[New Trader]

Hello Roger D, really appreciate your comments and charts. Where would you suggest placing a short position on the Dow today? Assuming it continues to bounce I was thinking of building a position from around 10000 with it possibly retracing to around 10100 ish. Would appreciate your suggestion.

Cheers

[cloudslicer]

I think what is skewing the charts is the flash crash in May. If I disregard the spike down as an anomoly the SPX counts best as in a wave 5 down having just completed the wave 4 up last Friday.

I don't like doing this, the wave 4/ wave 1 overlap rule is never to be violated.

But the whipsaw action of the last two weeks is certianly indicative of 4th waves.

That implies a washout to the downside. According to Ed Handley, a radio show that I follow here in Maryland, the 4th wave wave of the 3rd wave is normally were the following wave ends. That is, when we get the next multi-week rally the target will be were the 4th wave of the 3rd wave ended.

Thats 1090 for the top of the wave 2/or B of a grander degree.

So the gaps at 1106 and 1117 should hold for a very very long time.

[Steven_737]

Hello Duncan

you mentioned
"a lot of overlapping waves on Friday".

Have a look

http://steven737.typepad.com/blog/2010/06/price-action-06042010.html

(Restricted audience! chart for wave counters ONLY)

cheers :)

[Bird]

Could be wrong but, because Friday's low at the end of the day is not well locked in harmonically, a higher open and rally without first making new lows is not a foundation for a strong bounce and thus actually bearish.

[Molecool]

Bird - can you elaborate?

[High School Kid Trader]

Friday's low not being pleasing to the eye means poo-poo. All it means is that Bird is probably short and would prefer to take some more profits before he exits. The market more often than not does whateverit damn well feels like.

[High School Kid Trader]

The delta of Friday's low when you divide it by it's theta and take a look at uranus says the low is actually not in, same predictive value, NIL! except for the 50%/50% chance of getting lucky.

[Bird]

Molecool, I study market geometry using some refinements on fibonacci arcs. Most significant turning points are "locked in" via this geometry. Sometimes turns are locked in that do not represent "THE" turn, like a w-3 interim low instead of a w-5 final low. So it can be tricky. But when the geometry isn't in place for a turn, as in Friday's lows on the 10 minute, then the expectation is for the trend to continue until a harmonious lock-out occurs. I should say that there is some indicia of harmony with Friday's low, just not as much as I would be looking for for a strong upmove. So there is obviously room for error if I start getting dogmatic about it. But I would be lost without it.

[HighSchoolKidTrader]

While you guys have been pondering, hemming and hawing, I've already successfuly scalped twice and peeled off 10 C NOTES.

Any other High School Traders out there running rings around the intellectual wasteland?

[Account Deleted]

SP 500 Fibonnacci levels in hourly chart
http://niftychartsandpatterns.blogspot.com/2010/06/sp-500-hour-chart-fibonnaci-levels.html

[Bird]

If only you were as pleasing to the eye, Kid Trader, like Mamma.

Thank you for clarifying what does and does not have predictive value for me.

You are quite surely right that there is more to the holy grail than what I see when I look out my own eyes. But when I look in....

[HighSchoolKidTrader]

Here's the third trade now in the money with a stop moved down to lock in a profit.

Folks it's not that hard if you step out of the Ivory tower and leave your fear jackets on the coat rack.

Those who don't know do Elliott. Those who know can then trade

[Bird]

HSKT, Hubris tends to whack the shit out the side of my head.

[HighSchoolKidTrader]

Wake-Up!

An important retracement level is coming up fast. If you had shorted about 40 minutes ago you coud now lock in a sizeable profit and quit for the day like me or continue stuffing your face.

Peace out!

[HighSchoolKidTrader]

Don't be so sure.

You are looking at a 20+ year old picture of mama.

You are most welcome for the clarifications anything to help but I am really doing for the general public good.

It's no fun playing alone.

[Steven_737]

Projections for wave 3 06-06-2010

http://steven737.typepad.com/blog/2010/06/projections-for-wave-3-06062010.html

cheers :)

[Bird]

I understand. Science over religion. I have no problem with your public service announcement Kid.

Poor mamma. Down by her knees by now.

[HighSchoolKidTrader]

I'm closing the 3rd trade now.

Like shooting fish in a barrel.

Taking the rest of the day off you guys have fun.

I'll be back 30 minutes before closing to to this all over again.

[HighSchoolKidTrader]

Damn, forgot I had a 4th trade this one is long and it just got filled.

Doesn't matter I'll just put it on a tight leash and come back to see what happened. I don't like to work more than 3 hours on days like these.

[usdollar]

i think the side lines are perfect for me, not a day trader. Either LD or H&S? so setup for a big downturn is around the corner.

[HighSchoolKidTrader]

Up or down is fine for me.

Peace to you too Bird.

I'll try leaving one more time...

[Account Deleted]

Micheal !!

What a post about Worst president being George Bush.I give u ten on ten for it.Bush was easily the worst president US ever had(one more a little less worse was his father who unnecessarily fought Iraq in 1990s).No one can match his foolishness,not even Jimmy carter.I dont need to mention his acts of foolishness as u have correctly mentioned them in your post.

Just one thing u have missed out and that is that "George Bush Even LOOKS Like an IDIOT HOMOSEXUAL MORON" (his homo-partner being TONY BLAIR)

Regards
VB

[HighSchoolKidTrader]

US Buck;

I don't know what you're looking at but you would do well to go long and slide your stop up as you make more money. We've made a good low for today.

[Be kind to thy neighbor committee]

GW also looks like Will Farrell though, so if we wanted to be a little kinder you could say GW looks like an Elf a Nascar Driver or maybe a comedian?

[yelnick]

cloud, we could be in an LD, which has 4 overlapping 1. I will post more on this soon

[Mamma Boom Boom]

For some reason my ears are burning.

Oh well!

I said the market should stabilize by noon. Seems to be right on schedule.

[Mr. Panic]

Russell 2000 and $ndx now below their 200day averages and I expect them to close below the 200day (for the first time since May 2009??)

[Wave Rust]

For heavens sake people
this is a correction IN A BULL MARKET!

I believe corrections are annotated with a,b,c's ,,,, right?

Yelnick,
Respectfully, as for pushing the edge of TA !!??? with a slow moving average of stocks below even slower MA's is (cough, cough) not edgy, it's dull, inconsistent, undefined and loose as you look back over a longer time span ,,, useless in my opinion.

Helen Thomas has more up to date TA than that! :-))

fwiw, spx is not even oversold yet.

the daily chart looks like it wants to complete an A then rally hard through everybody's "it can't get past this" Maginot Line, and, run to about 1170+ to form the B of a flat that eventually gets an extended C wave down (near 870) into year end, or perhaps April next year.

That would definitely be a great 2 primary wave wouldn't it. The real question is how do you trade the 'piig' races before the 'brick' races begin. Will euro parity happen and will it be the stock market low? :-)

Think about it this way ,,,, what do you least expect? what do the fewest people expect? What will make you believe you are wrong?

Me? I see here and elsewhere that everybody is counting bear market. (except for caldaro)

Ask DG for the minimum time a correction should take, after 13 months of a bull market rally?

wave rust

[upstart]

I think the 13 months was the first wave of a 3-wave upward move, which may not end until 2011. That's my guess. The even tougher guess is what the 3-wave move fits into. Is it a wave 2? Is it a three within a developing triangle?

[Wave Rust]

good idea Upstart.

a 3 could turn into a 5. :)

it might fit as part of a higher C wave structure if 2002 was A and 2007 was B and 2009 was a of C

wave rust

[High School Kid Trader]

Stopped out of my 4th day trade for a small loss. Three out of four good is still up there with the best and I'm only a "High School Kid Trader" that doesn't know much about elliott.

I think I'd rather make a couple grand most days than sound all scholarly and knowledgeable.

2 grand a day is better than pimping, being a market guru or being a drug dealer plus it's legal and I don't have to do any bitch slapping or screw over people's lives.

Take care scholars

[Middle School Kid Trader]

High School Kid,

Pimping is more fun than trading, because I can do it from middle school and don't need to sit in front of a frickin computer, which gives me such a headache. Also, Blanche is teaching me things I never knew before.

I noticed that your first 3 trades were not "real time", as in, you told us about your successes after they happened. Only your 4th trade was real time. Could that have anything to do with your success rate? If so, how can I trade real money after the fact too, like the high frequency traders? I so admire them.

And you.

[HighSchoolKidTrader]

Bird wrote:

"I noticed that your first 3 trades were not "real time", as in, you told us about your successes after they happened. Only your 4th trade was real time. Could that have anything to do with your success rate? If so, how can I trade real money after the fact too, like the high frequency traders? I so admire them.

And you.

Posted by: Middle School Kid Trader AKA Bird| Monday, June 07, 2010 at 02:22 PM

Bird, Bird, Bird, here! let me flash you the bird!

All 4 trades happened in real time like I wrote. The results of the fourth trade was discovered after hours and posted after the fact as I went to the race track for some R&R.

I take care of business first then post as fast as reasonably possible but business is always first so if things don't match up to the nano-second well that's too bad but it should be clear to correlate that it was in real-time.

Those that pretend to know hours, days, weeks, years in advance are the real posers —at least if they're tryin' to day trade. It's a whole different ball game Bird-Man.

Posting to your standards so you can verify my trades would be very difficult. I did 3 of those trades before you were done pickin' your nose.

Then there are days like today when I'm chillin and have time to set you straight, but I didn't know it was goin' to turn out this way ahead of time.

Don't be a hatin', dawg. It's not my fault I'm younger, purttier and more successful than you.

I'll let you be my side-kick if you chill and act civilized.