Recent stock buyers are hoping that Fed Chairman will hint at a new round of easing today in order to improve the faltering economy, but MoneyShow’s Tom Aspray takes a look at the market's internal health to determine whether they might be disappointed.
The widely anticipated speech by Ben Bernanke will likely be occurring as this article is being published. Though more and more investors seem to have moved to the sidelines, some apparently bought stocks over the past few weeks in anticipation of a new round of easing.
Taking a position in expectation of a change in policy is never a good idea. Over the years, I have found that the technical studies will warn of a market turn well ahead of any news.
For example, several months before the Iraq invasion of Kuwait in 1990, crude oil and gold had already completed their bottom formations. This gave the technical investor a good opportunity to get long before prices surged.
The technical outlook for the stock market has not changed much since I left for vacation several weeks ago. The Spyder Trust (SPY) is now just about where it was on August 10, when I advised that investors should not be “greedy or complacent,” as the technical picture did not favor aggressive action.
So has the technical outlook changed enough to take a more aggressive position in the stock market? Or does it suggest that stock investors will be disappointed as they head into the Labor Day weekend? Let’s look at the evidence.
Chart Analysis: The NYSE Composite peaked on August 21 at 8,160, and as of Thursday’s close is down 2.4% from the highs. There is stronger resistance from May at 8,211.
- The daily chart shows a well-established trading channel (lines and b).
- There is next support at 7,870 to 7,730 and the uptrend (line b).
- The new highs in the NYSE Composite were confirmed by the A/D line, as it moved well above the early March highs (dashed line). This is positive for the intermediate-term trend.
- The NYSE A/D line closed below its uptrend (line d) and its WMA on Thursday. This has weakened the short-term outlook, and increases the odds of a deeper correction.
The Spyder Trust (SPY) also made its high of $143.09 on August 21, and is now testing support in the $139.80 to $140.20 area.
- The close on Thursday was right on the 20-day EMA, with further support in the $139.40 area.
- The daily uptrend (line g) is now in the $137.60 area, with the 38.2% Fibonacci retracement support at $137.
- A daily close below this level will suggest a drop back to the 50% retracement support at $135.12.
- The S&P 500 A/D tested the long-term downtrend (line h) as prices were peaking, but the pattern of lower highs (negative divergences) is a sign of weakness.
- The A/D line has been below its WMA since then and has important support at line i, which corresponds to the late July-August lows.
- There is major support at the June lows, as the bullish divergence identified the market lows.
- The S&P 500 A/D line needs to move above the August highs to turn positive.
NEXT: A Closer Look at Tech and Small Caps