Editor's Note: the following analysis was offered this morning via Scott Reamer's technical service. We share this vibe with educational intentions only. For more information regarding Scott's unique approach, please click here.
Last week was certainly a frustrating one to be sure; despite multiple, ongoing signs of narrowness and weakness beneath the index prices, indices have not rolled over and some (the SML) have even made new peaks above the March 7th peaks, meaning that, for the SML anyway, current prices are at an ALL-TIME peak. Who says it has been a bear market since 2000?
The good news is that the larger longer term trend remains bearish even if, say, the SPX and/or DOW makes a new peak above the March 7th highs. This is owing to the fact that the bounce from March 2003 is just as much in its final stages as it was in March 2005, not to mention the presence of daily and weekly divergences, which have gotten worse since the March 2005 peak. Add to that the Dow Transportation Index, which has a classically bearish setup within our models and by probability should be turning back down in earnest from around current price levels.
That said, new annual peaks (in the SML for instance) do in fact cloud the intermediate term (multi-week/month) trend, presenting several more paths, scattering the probabilities, and thus lowering our confidence in the intermediate term. Yes, the DOW and SPX are below their March 7th peaks. Yes the Transports are bearish. But the SML has gone to a new high, the SPX is actually above its 78.6% resistance level, and the NDX could - with a new swing peak - produce an impulsive sequence off the April lows.
Make no mistake: prices are overbought and showing all the same divergences that we have been cataloguing. That means we're still expecting some sort of decline shortly in the Blue Chips. It's what happens AFTER that decline that has now become 'cloudy'; whereas before we were highly confident of an outright bearish decline, now there are a few more paths presented by our models that are less bearish. We must respect those less bearish possibilities. After all, the divergences we have talked about have not mattered (improbably) for several weeks, so they might continue right on not mattering for a few more. Don't get us wrong, we could still decline outright from Friday's DOW peak, but the price action - the refusal to go down despite massive underneath weakness - suggests stock prices may - MAY - have a different multi-week/month destiny than the one that seemed likely from late May to early this week. We'll simply have to wait for confirmation by a breakdown below important supports as well as the creation of a clearly impulsive decline. We'll take it one step at a time then.
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