S&P 500 2108.58; all time high 2134.72.From Barron's Getting Technical column:
We would not be at all surprised by a decline into early August but, contra Carl Icahn, don't think we've seen the top yet....
Charts show index dipping below 200-day moving average for second straight day amid fierce volatility.
Blame China. No, not the 32% market massacre that occurred in Shanghai over the past month but the old Chinese curse, “may you live in interesting times.” One look at the charts of major market indexes suggest that “interesting” is an understatement. Wednesday’s temporary suspension of trading on the New York Stock Exchange was just icing on the cake.
After months of sideways action and false moves, the Standard & Poor’s 500 finally scored a true technical breakdown. It moved below the pattern that had held it in check since February, taken out the May low, and now dipped below the more important 200-day moving average for the second day in a row (see Chart 1).
Chart 1 Standard & Poor’s 500
That is enough for even casual users of charts to get worried. What gets me worried is that Tuesday’s session, in which the Dow Jones Industrial Average saw a morning loss of 200 points turn into a closing gain of 93 points, was erased quickly Wednesday.
In technical circles, the positive reversal of fortune left sizable “hammers” on Japanese candlestick charts. In candle-speak, the market is hammering out a bottom and after a two-month slide it did look that it was time for a rebound. But as with many chart patterns, confirmation in the form of upside follow-through was needed to prove that the market had found a floor. That was not to be.
Failure to capitalize on such a reversal is bearish. And now seven of the nine major Select SPDR sector exchange-traded funds, and that includes technology (ticker: XLK ) and financials ( XLF ), are at or below their 200-day averages, as well.
Consider that last week all eyes were on Greece and the referendum that was to take place over the weekend. When voters said “no” to another bailout, global markets fell sharply. Wednesday, the panic shifted to China and a market meltdown there that was already in progress (see Getting Technical, “Greek and Chinese Stocks in a Dangerous Situation,” June 22). It seems Greece is already old news and considering the sizes of the two economies that is not a surprise.
Stepping outside the charts for a moment, an economic slowdown in China could indeed spread. And while the International Monetary Fund’s suggestion that the Federal Reserve hold off raising rates here may not hold sway, it does speak to worries about the global economy.
A breakdown in the SPDR S&P Bank ETF ( KBE ) manifests that idea in the charts. Banks were supposed to benefit from a rising rate environment (see Getting Technical, “Finally! Bank Stocks Break Out, Including Fifth Third, Key,” May 13). That they have cracked now suggests the market is no longer looking for the Fed to start raising rates any time soon.
In the past, any time the Fed assured the market it would not rush to raise rates, stocks benefited. Banks are telling us now that may not be true anymore. Weak fundamentals, rather than low interest rates, may be the driver over the coming months.
The question for investors is whether this is a correction or the end of the cyclical bull market that began in 2009. Unfortunately, the answer is still not known although it is very likely that cash should be an important part of any portfolio at this time. Here are three technical ideas that we can use to differentiate a correction from a bear market:
First, Dow Theory will tell us that the primary trend has changed when both the Dow Industrials and Transports make significant new lows (see Chart 2). The Transports have clearly been weak and are well below their significant lows from earlier this year. Some will say that if the Industrials move below their February low at 17,037 the sell signal will flash (the Industrials traded near 17,590 Wednesday afternoon).
Chart 2
Dow Jones Industrial Average
Second, if the market declines in a somewhat orderly manner, the Industrials should suffer a moving average death cross...MORE
