Technical Rhodes

03/19/2004 12:00 am EST

Focus:

Richard Rhodes

Founder, Rhodes Capital Management

"We've seen a quick and violent change in 'sentiment' from bullish to bearish," says technical expert Richard Rhodes. "In our years of experience we cannot remember such a 'watershed' change." He holds four short positions in domestic ETF to play this bearish outlook.

"While we are focusing on the indices to see if in fact they are able to mount what we consider to be sustainable countertrend rallies, we are currently taking the stance that all rallies should be sold from this point forward. For now, our forecast is for lower prices in the US indices, and we are holding short positions in several exchange traded funds:

Dow Industrial Diamonds (DIA ASE): January’s ‘terminal blowoff high’ was part and parcel of a larger and ‘broadening range’, of which the breakdown indicates the formation of a larger high. In fact, the recent violent decline broke through the rising 80-day moving average (dma) at $103.50, which now sets the stage for further declines back towards the 200-dma currently at $98. However, given the oversold nature of prices, we would do well to ‘carefully watch’ the 80-dma, for it has proven its merit time and time again as a material fulcrum point. Our initial target is $96-$97, with a stop at $104.

NASDAQ 100 QQQ (QQQ ASE): For the first time since the March 2003 lows, major support levels are being violated on a consistent basis, a materially negative circumstance that augers for a continued decline. The December 2003 breakout level turned support at $36 was violated; the intermediate-term 80-dma was violated; and the October 2002 and March 2003 trendline was also violated. Collectively, this augurs for a return to longer-term support. Our initial target is $33-$34. Set a stop at $36.50.

S&P 500 SPYDERS (SPY ASE): The larger and obviously quite negative ‘broadening top formation’ clearly broke through major support at $112.50-$113. That said, next level support at the rising 80-dma at $112 was also violated, but given it is rising fairly sharply–we can expect a modest bounce back rally into support turned resistance upwards of $113. However, our indicators are declining from a lower peak, and remains quite some distance from oversold levels. The trend is lower, with a test of the 200-dma at $106 very likely. Our initial target is $100-$102, with a stop at $113.95.

Russell 2000 Small Cap (IWM ASE): The recent move to new highs ‘failed’ given prices were unable to extend to further new highs. Clearly, this reversal was materially negative, as the price violated trendline support as well as the major 60-dma support level–all within the context of our indicators moving lower. And, our indicator is quite some distance from oversold levels. Hence, given the damage, we expect further weakness. Our initial target is $104-$105. Set a stop at $116.75.

S&P 400 Mid Cap (MDY ASE): A series of new highs was formed amid a significant loss of momentum, as each peak was only modestly higher than the previous one. When coupled with a recent 'outside reversal day’ is indicative of an intermediate-term high. However, although the trendline support and the 40-dma were broken–no short-term low has been violated. While this is problematic, we believe it augurs for further downside price action. Our initial target is $97-$100, with a stop at $111.30."

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