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Point & Go Figure: (DJIA, NDX, TRAN, IYC, IYM, IYE)




Yesterday, for the first time since the decline began I heard on financial television the words "capitulation" and "bottoming" used in the same sentence. Typically, when mainstream media uses those words together, that means we are not close to either.

As yesterday morning's article pointed out, we are not yet close to levels that produced a good tradable bottom this past spring. We are getting closer, but the overall market context remains negative, and surprises will come to the downside as long as that remains the case.

My strategy at times such as these is to continue selling rallies, rolling down stops on short positions. The point & figure indicators I follow will change to positive when it is time to alter that strategy and shift from selling to trading from the long side. So the answer is, no... we are not there yet.

Dow Jones (DJIA)

NASDAQ Non Financial Index (NDX)
The NDX shows a couple of trendline violations since August 2004 that were rather quickly reversed. This index remains on a long-term "buy" signal dating back to August of this year. Support is at 1500, and a move below that will bring the trendline at 1460 into play. This side of the market (NDX and NASDAQ Comp) continues to show the best relative strength versus the SPX. It remains to be seen whether that relative strength translates into absolute returns, however. For now, there is no technical evidence the NDX has reached a level similar to either August 2004 or April 2005. Expect more downside.

Dow Jones Transports (TRAN)

iShares Dow Jones U.S. Consumer Cyc (IYC)

iShares Dow Jones U.S. Basic Materials (IYM)

iShares Dow Jones U.S. Energy Sector (IYE)

The IYE underwent a classic corrective formation above the long-term trendline from March to May. Is this another correction, or the start of something more serious? A high-pole warning is a retracement of more than 50% of a breakout greater than three boxes. The IYE has given a high-pole warning, retracing the entire September spike. It has reversed up, but the reversal lacks strength and momentum and is occurring within an overall negative market context based on the PnF indicators. Support at 81 is critical. A move below 81 would suggest a more serious reversal has occurred, endangering the lingering energy bull market.

All charts courtesy Dorsey Wright.

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No positions in stocks mentioned.

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