We’re Not Giving Any Thanks To This Market… But This Indicator Can Forecast Its Next Move
Monday, November 24, 2008
by Jim Stanton, Technical & Quantitative Analyst, Smart Profits Report
With Thanksgiving just a few days away, investors are still just as scared as turkeys when they see the guy with the axe coming.
If this month closes the same way it’s performed over the past few months, we’ll be scratching around looking for crumbs of positive data. Yes, the markets have rallied a few times, but it’s proven to be nothing more than a short-term tease.
Having been on vacation for a couple of weeks, my last edition of “Sector Watch” on November 3 featured an hourly chart of the S&P 500. It showed that the index was probably in a bearish consolidation pattern that would eventually resolve itself to the downside.
I noted that the S&P’s rally should run out of steam on either side of the next resistance levels - 986 points and 1,044. Sure enough, having rallied to 1,007 the very next day, that proved to be the high for the month - and the index has stumbled downward ever since.
So where are we now?
Want To Go Bottom-Fishing? Good Luck!
Over the past few weeks, we’ve seen broad-based, relentless selling, with most sectors trading at or near new lows for the year.
Late last week, the S&P 500 reached my minimum downside target around 765, before the indexes reversed course on Friday and rallied sharply into the close.
In fact, all the major stock indexes reached my minimum downside targets as of Friday. While that sounds bad, it does mean that the correction may be ending.
That said, this is a very dangerous market. Trying to pick a market bottom is a challenge at the best of times, but in this climate, trying to do so is a real risk if you don’t know what you’re doing.
So while I’m seeing some positive signs, the smart play is to wait for more significant buy signals.
Right now, it’s too early to tell when, and at what level, these buy signals could be triggered, given that the indexes only made new lows last Friday. But a close above 835 on the S&P 500 would set up a half-day buy signal.
That goes for individual sectors, too…
Looking For “Black Friday” Bargains
Most of the sector indexes followed the broader market’s lead in making new lows last week. And because none of them have yet triggered any buy signals, it’s a challenge trying to nail anything down with much certainty.
Rather than sit on the fence, though, there were a handful of sector indexes that didn’t make new lows last week and are at least showing some temporary relative strength. If the market gets going to the upside, they might be the best place to start.
Specifically, we’re talking about…
Amex Airline Index (AMEX: $XAL)
Amex Oil Index (AMEX: $XOI)
Amex Pharmaceutical Index (AMEX: $DRG)
Gold and Silver Index (Philadelphia: $XAU)
Of these four indexes, the best-looking chart is the Philadelphia Gold and Silver Index ($XAU)…
Here’s When You’ll Know That Gold And Silver Are Heading Higher
As you can see, the index rallied sharply last Friday and the downtrend line, drawn off the July highs, is around the 101 level.
And because the 50-day moving average (the red line) is sitting right on top of the downtrend line, that level has more significance.
So what does this mean?
Simply put, a couple of closes above the 101 area should lead to higher prices.
Make A List… Check It Twice… And Watch The Spread
If you want to get a good gauge of the stock market’s direction, rather than trying to pinpoint tops and bottoms, I find it’s more fruitful to look at the following spread chart.
If you’ve read my previous columns, you may remember me referring to it before. It basically plots the difference between the Nasdaq 100 (^NDX) and the S&P 500 (^SPX) and is often a leading indicator of market action. Here’s the latest action…
As you can see, the indexes rallied from mid July to mid August (the spread chart coincides with the August highs) before embarking on the vicious new downtrend that we’ve endured recently.
Generally, when the market is bullish, the Nasdaq 100 will outperform the S&P 500 and the spread will move higher. In bearish markets, like the one we’ve experienced lately, the spread moves lower.
Here’s what the spread tells us at the moment…
I’ve drawn a regression channel from the August highs. As shown, the top of the channel coincides with the 20-day moving average around the 330 area. If the spread (the Nasdaq 100 minus the S&P 500) can close above this level a couple of times, the indexes should move higher.
That’s it for this edition. All that remains is to wish you and your family a very Happy Thanksgiving.
Jim
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