by Christopher M. Quigley, B.Sc., M.M.I.I., M.A., WealthBuilder.ie | May 21, 2010Print
Due to lower highs and lower lows on both the Dow Industrials and Dow Transports there is now a change of trend in existence in the markets. How low this correction will continue no one can be sure. A bounce can be expected at any time due to the fact that the market is terribly oversold based on Stochastics and the McClennan Summation Index. But I do not think we have seen support lows in place yet. What is the reason for this capitulation? As mentioned in my last brief I believed the “flash crash” of the 6th. May mortally wounded all indices from a technical pointy of view. It will take some time, probably the whole summer, before some degree of confidence is restored.
Ironically from a momentum point of view this is a fabulous market is you are happy going short. Through the development of short ETF’s it has never been easier to be a bear. There are now “long financial products” which take advantage of such price action. For example TZA gives you three times the change in the bear small cap index and TYP likewise for the technology index. In the last five days these products have show gains of approximately 33% and 26% respectively. In my view there will be many more opportunities to profit from this bear approach before any reactivated bull trend if formulated.
Apart from classic Dow Theory signals the current bear market movement was also foretold by the fact that the price of the majority of the stocks in the Wealthbuilder pension portfolio had crossed their 200 day moving averages and few of the Wealthbuilder value portfolio stocks were receiving solid buy signals. Thus in other words the market has been heralding its weakness for some time and this weakness developed into sustained bearishness that has now become broad and deep.
But all is not doom and gloom. The former bull trend had lasted since March 2009 which historically is a long time. This current correction is good in that it will allow a lot of froth to be cast out of the system and once the technical integrity of the market has been restored hopefully the bulls will manage to reassert their leadership. Of course as always I will keep my options open and believe what I see rather than what I want.
Dow Industrials Index (Weekly)
Dow Transports Index (Weekly)
Daily Small Cap Bear (X3)
Daily Technology Bear (X3)
Copyright © 2010 Christopher M. Quigley