The Morning Cup of Jo
Do Ya Think?
It's almost hard to believe less than a week ago the markets were knocking on the door of a substantial breakout. Now it's just the opposite, "Can they hold this support?" How quickly things can change. Quite frankly, one of my biggest concerns with the latest sell off is the volume, it has increased substantially and that's not historically indicative of markets wanting to go higher. Another concern is the secondary markets. Most are starting to crack through major support and the ones that were leading have done an 'About Face.'
The 3 healthiest equity secondary markets, in my opinion, were the BTK (Biotechnology), the RLX (Retail) and the XHL (Healthcare). As of Friday, all three have given a RSI and Stochastic Divergence warning signal, a MACD crossover and are sitting on their IT trend lines. If these three add to the cracks already in the sidewalk it could lead to an earthquake.
The next graph shows the S&P Retail Index for illustration of the divergence.
Another significant index you often see the Professors talk about is the Bank index. We point out its important relationship to the market's action, but you seldom hear about the XBD (Broker/Dealer) Index. This index, one of the sub categories of the financial index, is also in poor shape. It has broken its IT trend and on Friday proceeded to fall through its 200 DMA.
Pure speculation comment - "If the market is the greatest leading indicator of the economy and this index can help determine the profitability of companies directly affected by the market, then I believe this secondary index to be a vital gauge in assisting the foreshadow of a coming trend change."
The healthiest Index technically, Russell 2000, is also approaching a breaking point (555). This index is very concerning as well. A break of support could lead to a fast and furious sell off because of the liquidity issue - not enough average daily volume for the gorillas to get out fast enough (selling begets selling).
Onto even worse news... You are already aware of the fact the SOX cracked in a major way on Thursday. This assisted in Friday's action which led to the Nasdaq closing below its 200 DMA for the first time since 3/14/03. The last support left is 1,897 prior to heading for the next technical support level of July high/September low (about 1,700).
*(For further illustration of IT support of the majors please refer to 'The Meeting at Ollie's Diner' article.) **(For further illustration of LT support levels please refer to the 4/20/04 'Jo')
One last graph - the SPX. I put this in today to merely show how close we are to an actual break of the IT trend.
Like I stated in the 'Jo' last week, none of this amounts to a hill of beans until something breaks. However, there sure is plenty of evidence to suggest Boo and his buds are comin' out to play.
I hope this helped.
Until next time...
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