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Is the Market in Trouble?

02/25/2010 3:32 pm EST


Lawrence McMillan

Founder & President, McMillan Analysis Corporation

Technical analyst Lawrence McMillan tells he has turned bearish because of negative trends in the charts, and he thinks stocks can fall more.  How is the market [these days]?
McMillan:  Well, I am a little bearish on the market.  We look at basically four things, a couple of option-related things, like put/ call ratios and volatility, and then also of course the chart and breadth.  But of those things, the chart is pretty negative, and it has had trouble ever since [the Standard & Poor's 500] got up to 1150 in December or early January, you could not get through.  In fact, in one day it made a marginal new high by a few pennies, and then collapsed. 

And now we have made a lower low and a lower high, and [an] even lower low.  So we have a pattern now of declining bottoms and declining tops, and that is an intermediate- term bearish signal, in my opinion.

Q: For a number of months, you have been pretty bullish even though [you] have been looking for warning signs.  You said that as long as the trend is up, you would have to stay bullish.  Now you are saying the trend is down.
A:  That long trend line that existed from March through December has been broken and even there we looked at support levels.  I think the first support level we were looking at was around 1130, and then 1100. Those got broken.  But even there, there was a chance to hold on at 1085--that was really the series of lows in December or November. 

Once that was broken, then I thought now the market is really in trouble.  So, it had the little reflex rally at the end of January, which it often does because money comes into the market during January, and fund managers sometimes wait until the end of the month to put it to work. 

So, you are looking at support levels.  The next support level is really 1020 to 1030 in the S&P. If you go back, you see that is the September and October bottoms.  So we have broken the series, for a long time, since March.  Each month it was making a higher low.  Now we are good making lower highs, which is just the opposite.

Q:  Given that, how likely is it that we will break through that 1020 support level and go even lower?
A:  In my opinion, I think that is probably going to be about it for this move.

Typically, coming off a top, the first move down is 10% to 15%, so that is in that range.  Obviously, there were quite a few bullish signs originally, so there were still people waiting, I think, to think this might still be a bull market, and I would not be surprised to see at that point a halfway decent rally in the spring and then resumption of the bearish trend in the summer again.

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