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(3/3/07)
As I pointed out in early February 2 Period Monthly Relative
Strength Index (RSI) had risen well above the 90 level (point A) which was a
signal the market had become very overbought. In the past when the 2
Period RSI has risen well above the 90 level (points B) this has been followed
by a correction in the S&P 500 (points C to D). 
Meanwhile despite the big drop this
week keep in mind the S&P 500 has been making a series of higher Highs
(points E) and lower Lows (points F) since the late 2002 bottom.
Also notice that each time the S&P 500 has gone through a major correction
since 2004 (points E to F) that it has failed to hold support at its 40 Weekly
EMA (blue line) and has been finding support near its 80 Weekly EMA
(green line) instead. If this pattern continues then we may see the S&P 500
drop back to around its 80 Weekly EMA which is currently around the 1320 level
before a potential bottom occurs. 
As far as the Dow it's
now nearing its
40 Weekly EMA (blue line) which is just below the 12000 level. Also notice
when the Dow has gone through a major correction since 2004 (points G to H) it hasn't held
support at its 40 Weekly EMA either. 
Meanwhile if we look at some
Retracement Levels for the Dow calculated from the July 2006 low to its February
high you can see the 38.2% Retracement Level coincides with its 40 Weekly EMA so
this will be a key support level for the Dow in the near term. If the Dow
fails to hold support near the 12000 level then its next level of support would
probably be either at its 50% Retracement Level near 11700 or at its 61.8%
Retracement Level just below 11500. 
The
Nasdaq has been making a series of higher Highs (points I) and lower Lows
(points J) as well since making a bottom in late 2002 but the corrections
(points I to J) have been more severe as compared to the Dow and S&P
500. Also notice there has been remarkable price symmetry in the
Nasdaq since the middle part of 2004 as each 25% to 26% gain has been followed
by a 14% to 15% correction. Meanwhile the last big upward move in the
Nasdaq from July of 2006 through February was also +26% so if we now see a 15%
correction that would eventually take the Nasdaq down to around the 2150 area
before a potential bottom occurs. 
Finally in the near term there was
an increase in panic among investors last week as the both the Put to Call Ratio
and the Volatility Index rose substantially. The 5 Day Average of the Put
to Call Ratio rose well above the 1.0 level this week (point K) and is higher
than the level that was reached in May of 2006 (point L). In May of
2006 the S&P 500 dropped just over 6% in less than two weeks (points M to N)
as the 5 Day Average of the Put to Call ratio rose well above the 1.0 level. This was then
followed by a brief 3.5% rally (points N to O) before more selling pressure
developed which was followed by a 5.6% drop before the S&P 500 made a bottom
in mid June (point P). Currently the S&P 500 has dropped nearly 6%
(points Q to R) since peaking just above the 1460 level just over a week
ago. My feeling based on the very high reading in the 5 Day Average
of the Put to Call Ratio is that we could see a brief sharp oversold bounce
develop at some point next week in the market. 
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2006 |
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| Dow |
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