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Tuesday, March 3, 2009

DOW and SPX 500 new lows - a short-term bear trap?

The moods of the markets have suddenly changed. All over the medias we see aticles how the November lows of the S&P 500 and DOW JONES are broken and the road to the worst bear market is now open. Maybe this is right.. and maybe not so much.
At least in a short time.

Explanation follows :)

On the daily graph the market seems oversold. It has broken its lowest November levels, moreover it has gone below the lows of 2002-2003 year. This alone seems bad enough for all the filled-with-hope people to run out of the markets selling their stakes and even taking short positions. Now they are hoping again, only the hope is to profit from the downward movement.

The same oversold condition we see on the weekly graph. With stochastic being this low we could expect the strenght of the down movement to start to vanish. The next stop could be found around 630-680 - levels not seen from 1997-98. The inertion could put the market to that point but will such a slide have a power to continue?
What could happen is to be formed a real bullish MACD divergence. The lower the market goes with not having the indicator breaking its own November low, the stronger the chances for a rally. With the negative sentiment and more and more lower expectations there is a chance to witness at least a short term bull's rally. One that could bring the indexes to "hopefull" levels again.

Having all this said the main movement I still believe the American market has to make is deep downward. Such expectation is driven from the monthly graph where there is a real bearish MACD divergence formed on a very big time frame. Such a divergence could not be cleared with simply going to lows which are "in the middle of nowhere" (in this case the middle of the timeframe of the divergence). Moreover the MACD on the monthly graph is around half the way of its own down movement. If we change the timeframe to "Quarterly" - the picture gets even more clear.

All this are just thoughts written to test their accuracy in time. Trying to predict the market has proven to be a bad idea. But following the crowd seems worse. :)

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