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Dow's Downside Has a Ways to Go


Rallies should be sold until much lower price levels are reached.

Summary of Yesterday's Notable Technical Developments

An attempted follow-through to Friday's late rally in stocks stalled and equity indexes closed lower by roughly 1%, but trading was slow with volume much lighter than Friday's. The S&P went out at its low -- never a good sign. Commodities fared slightly better due in part to gains in natural gas and gold. The DB Commodity Index Tracking Fund (DBC) was flat on the day -- a moral victory. The dollar index was down slightly and is still below the 80.73 level we're monitoring closely (see DXY in Critical Market Components section below). Meanwhile, the benchmark 10-year US Treasury was weakest of all, down 1.3% in price to yield 3.59%. Looking at the first chart below, the short-term trends for stocks, commodities, and the US dollar are clearly visible. Interestingly, the second chart below -- which goes back to mid-September -- shows stocks and commodities to be almost flat in the intermediate term. The dollar remains in a nice uptrend that began December 1, while the 10-year Treasury is in an even stronger -- but opposite -- trend since early October.

Short-term trends on the 15-minute chart

Click to enlarge

Intermediate-term trends on the 130-minute chart

Click to enlarge

This morning
Overnight and this morning, the Euorpean and Asian markets put in a mixed overall performance. Singapore and Taiwan were the global leaders overnight with 1.5%+ performances. There were no significant losses by any country around the world, but there were multiple minor losses posted by various countries. Gold and oil are getting a boost this morning by weakness in the US Dollar (especially against the euro). Gold is trading (at 6:09 a.m.) at 1,067.20 -- well below the 1,075 resistance level for the yellow metal. Meanwhile, crude oil is up only 0.2% as well (despite the weak greenback). The moves in gold and oil are pretty much in line with the 0.2% loss in the DXY so far this morning.

Market Internals: NYSE
(Figures are rounded)

Critical Market Components (with ETF proxies)

S&P 500: Initial support at Friday's low of 1,044.50. The next levels of support are 1,036.18 (23.6% Fibonacci retracement of March 2009 to January 2010 move) and 1,025.21 (October 2, 2009 close). First resistance for the S&P comes in at 1,073.87 (January 29 low close), with more significant resistance in the range of 1,101 (75-day moving average) -- 1,103 (February 2 high).

NASDAQ (QQQQ): Similar to the S&P above, the NASDAQ has initial support at Friday's low of 2,100.17. Below that, additional support comes in at 2,075.94 (23.6% Fibonacci retracement of March 2009 to January 2010 move) and 2,040.21 (horizontal line support). The resistance for the NASDAQ will come in at the February 3 high of 2,190.91, with additional resistance at the 75-day moving average at 2,196.33. The QQQQs have initial support at 42.12 and resistance in the 44 area.

Dow Jones Industrials: The low print on Friday at 9,835.09 will act as initial support. Below that, the October 2 low close at 9,487.67 serves as more substantial support. Initial resistance for the Dow comes in at the 75-day moving average at 10,307.20. Slightly above that level, the February 2 peak at 10,314.84 should act as additional resistance.

10-Year US Treasury Yield (TLT used here as a proxy for longer-dated bonds): Major/critical support for the 10-year T-Note is Friday's close near 3.55%. The initial resistance area is the short-term peak at 3.709%. For those trading TLT, support is 90.27 and resistance is 92.46.

Commodity ETF (DBC): The DBC now has horizontal line resistance at 22.79 with additional resistance at the underbelly of the broken uptrend line at 23.71. Support comes in at Friday's low of 21.83, with horizontal line support below that at 21.36.

US Dollar Index (DXY and UUP): The DXY has initial support at the February 3 low of 78.68. Resistance comes in at the 100% Fibonacci price extension line at 80.73. If 80.73 doesn't hold as resistance, the next level higher for the DXY will be around 82.25. These levels translate into initial support and resistance of 23.27 and 23.76 for UUP.

Semiconductor Index (SOX and SMH): Initial resistance for the SOX comes in at the short-term peak at 328.70. Above that, the underbelly of the broken uptrend line at 335.75 acts as the next and more significant resistance. Support for the SOX starts at Friday's low print of 310.34, with horizontal line support coming in just below at 307.22. Resistance for the SMH fund comes is at 26.56, while support is at 24.42.

Bank Index (BKX and KBE): The BKX has initial support at Friday's low of 43.30. Meaningful additional support doesn't come into play until the 41.70 level (horizontal line). Resistance for the BKX starts at around 45. However, more significant resistance comes in at 47.84. The KBE exchange-traded fund has support and resistance at 21.51 and 22.34, respectively.

Crude Oil (USO): Crude oil has broken down recently and quickly registered short-term oversold readings. Initial resistance is around 74.75 (the underbelly of the broken uptrend line) and initial support is at Friday's low of 69.50. Those levels translate to USO support at 34.07 and USO resistance at 37.50.

Gold (GLD): Gold also broke down below its uptrend recently. That broken uptrend line is now resistance and currently comes in at around 1,075. That corresponds perfectly with horizontal line resistance at 1,075.20. Initial support for gold now becomes Friday's low at 1,044.50. For this move, I expect the ultimate support for gold to be down at 1,006-1,008. Support and resistance levels for GLD are 102.28 to 106.17, respectively.

Key Intermarket Charts

Monthly Chart of Dow Jones Industrial Average

Click to enlarge

  • Above is a monthly chart of the Dow Jones Industrial Average ($INDU). It's always best to get a handle on where the market is in the big picture before focusing on the shorter-term direction and movements.

  • In Elliott Wave terms, the Dow is in the early stages of wave 5 lower. Wave 4 seems to have ended in late January (notice the large red bearish engulfing candle in January following the small green candle in December -- an early sign of a loss in momentum).

  • If my wave count is correct, this wave 5 lower will, when it finishes, also complete wave C and IV in the longer-term wave count. From there, the Dow (and the other major indices) should see a strong rally develop over the longer term.

  • Notice how the 32-month moving average recently acted as a source of resistance (it has served as both support and resistance consistently over time).

  • Additionally, the chart is labeled using horizontal lines to highlight long-term support levels (follow horizontal lines all the way to the left side of chart to find specific price levels) that may be candidates for oversold rally attempts.

Daily Chart of Dow Jones Industrial Average

Click to enlarge

  • Zooming in a little, the daily chart of the Dow provides a better look at the short-term technical condition of the index.

  • Evident at the far right side of the chart is the break of the 75-day moving average -- a fairly reliable source of support and resistance over time -- in January.

  • There's a chance that recent decline may have hit a very short-term stopping point, as the bullish hammer candle (see yellow oval at far right of chart) put in on Friday is often a signal of a pause or reversal in trend when it occurs near support. Given the fact that the Dow's first support is at 9709.30 and the low tick on the Dow on Friday was 9835.09, the hammer may have had some meaning as a reversal signal. I'm not sold on that, though, as Friday's rally felt a little too much like a manipulation than a legitimate market turnaround.

  • Drawn on the chart are the Fibonacci retracement levels for the bull rally that occurred from March of 2009 to January 2010. Those lines correspond nicely multiple times with the various horizontal lines of support created by previous congestion areas and turning points. Just like the monthly chart, these Fibonacci lines provide us with several additional levels where oversold rally attempts may occur going forward.

130-Minute Chart of Dow Jones Industrial Average

Click to enlarge

  • The 130-minute chart of the Dow is used here to highlight the severe downtrend channel that has quickly developed.

  • Despite the late-day reversal Friday, the Dow (based on all three charts) should see more downside in the very near future. As I noted above, despite the potentially bullish "hammer" candle, I remain skeptical. Monday's action did nothing to dissuade my skepticism.

  • The only positive note I'd have to make is that the volume on Monday's sell-off was very light. Sellers may have been a little timid after the violent rally that occurred on Friday afternoon.

Strategy: Overall, the Dow still looks to me like it has plenty of downside to go before it's done. The 9,600-9,700 range should provide a level of support where we could see another rally attempt. Rallies should be sold, however, until much lower price levels are achieved in the months to come.

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