Market Overview (May 23 2006) – How Low Can we Go ?

[Ramsburg]

Market Overview (May 23 2006) – How Low Can we Go ?

Since my last Market Overview (last month), the market went from high alert, to high & fast sell off.
The truth is that even with the technical alert we were not expecting such a big dip, or at least not on such a fast way.

The NDX broke its support (the one supporting all 2005 Bull move), and within a few sessions, it is already near a much important support.

My attempt with this Analysis is to get a reasonable target for this sell off, I'm using a simple methodology of a Weekly DMI (Dynamic Momentum Index) integrated with a chart pattern approach.

The answer is quite acceptable, unless some major events are up to come:
Q: How Low Can We Go ?
A: 1540/1550 on the NDX (2% or 3% more of downside potential)

Weekly Chart:



Daily Chart:



Downside momentum is still high, panic has spread around some Global Markets... Lets see what's next...

Best regards !


.

[nullzero]

so if the nasdaq 100 index sinks below the support at 1550 we in for some trouble?

[Ramsburg]

so if the nasdaq 100 index sinks below the support at 1550 we in for some trouble?

I guess big trouble is what we have since the high alert till now... 

But yes, if that happens, it means the trouble is here to stay for a while... or maybe just means that my analysis was wrong...

regards

[ScottishTrader]

It looks like it could also play as a classic WolfeWave set up to me, minus the upside breakout of the rising wedge, the shape looks about right.  Calven and Melf Elf would probably know best about that.

While I don't think the market is weak enough to break down to quite this degree, if 1550 does not hold, this would be the long term WW target area - not very pretty!!!

[Melf Elf]

Frederick,

Very nice job on that channel and your indicator.  I didn't see that channel at all.  Applause.

It looks like it could also play as a classic WolfeWave set up to me, minus the upside breakout of the rising wedge, the shape looks about right.  Calven and Melf Elf would probably know best about that.

While I don't think the market is weak enough to break down to quite this degree, if 1550 does not hold, this would be the long term WW target area - not very pretty!!!

Scotsman,

DOUBLE Applause for seeing that Wolfe Wave.  That's very, very interesting.

See the rally off the October, 2005 low to the top of the channel in early December, 2005?  That was Calven's Bullish Wolfe Wave, basis the daily chart!

That rally ended at the top of this Wolfe Wave that you've identified on the WEEKLY chart.

Kinda kewl, huh? 

It's a Wolfe Wave within a Wolfe Wave.

There was an upside fakeout at Wave 5, too!  That was the absolute SCREAMER of a rally that we had right at the start of the year that lasted into the January 11 top, which ended up being THE TOP for the year, thus far.

Back then, earnings were expected to be good this year...the Fed almost was finished with rate hikes. tra la la la ...everything looked great!

FAKEOUT!!! 

So, it certainly has tha-at element, doesn't it? 

The week of April 7, 2006, the NDX went to the top of the channel again.  That failed on a Bearish Inverted Hangman...followed by a Bearish Hangman...followed by a Bearish Doji Star Hangman ... followed by another Bearish Doji Star Hangman...followed by a Bearish Hangman...

...followed by the horrible week of May 12!

The NDX certainly is acting like a Bearish Wolfe Wave, with the fakeout, the failed re-tests, and then the harsh Smackdown.

We'll see.  I'm sure going to pay attention to the bottom rail of that pattern! 

[SmartWrasse]

I have been bearish this year because of 4 year (mostly 4 year) market cycles.  Like these in the SP500 with a crash often in the summer, Usually followed by a rally!

[brandyjoco]

Wow - great work on finding the 4 year cycle charts!!

[Lucas Scott]

It looks like it could also play as a classic WolfeWave set up to me, minus the upside breakout of the rising wedge, the shape looks about right. Calven and Melf Elf would probably know best about that.

While I don't think the market is weak enough to break down to quite this degree, if 1550 does not hold, this would be the long term WW target area - not very pretty!!!

Good thing Wolfe Wave targets are unreliable! 1150 for the $NDX would be a brutal drop.

[Melf Elf]

I have been bearish this year because of 4 year (mostly 4 year) market cycles.  Like these in the SP500 with a crash often in the summer, Usually followed by a rally!

SmartWrasse,

Great charts on the 4 year market cycle.  Applause.  It's good to keep those things in perspective.

Since many members of 3SOF are relatively new to trading, I thought I'd present this chart for some perspective, as well.

If the past two weeks have looked depressing...from the March, 2000 high to the October, 2002 low, the NDX 100 lost an astonishing 83.49% of it's value.  A lot of the 100 stocks in the index were internet stocks that crashed, but this index also is comprised of the "bluest of the blue" in the NASDAQ, and they went down hard, too.

Although the NDX has rallied 121.5% off the October, 2002 to the recent high of 1761, that's barely a .236% Fibonacci retracement of the 83.49% loss. 

An NDX portfolio that was worth $100,000 at the March, 2000 high was worth only $16,510 at the October, 2002 low.  That same portfolio, left untouched, was worth only $36,600 (plus dividends) at the recent high of 1761, six years after the March, 2000 top.

So, from a longer-term perspective, the 121.5% rally over the past 3½ hasn't been nearly as good as it appears to have been for those whose portfolios have been tied to the NDX.

There's an argument, particularly from the Elliott Wave Theorists, that this 3½ year rally has been nothing more than a shallow retracement (.236%) of the 2000-2002 Bear Market.  They're wrong, of course, on many other sectors that have scored new all-time highs, but they at least have a case here, in the NDX.

We'll see how it plays out over the summer, but definitely HONOR OUR STOPS.   

Thanks again for the great charts.

[usedcasting]

Great stuff everyone, thanks. We are certainly at an interesting point here. Did we just get Elders Kangaroo tail and a turn around or is this a dead cat bounce. Next week should give some big clues. Have a good long weekend (if you get one).

uc.

[JKN]

Yea, nice stuff guys.  Looks like we are at some long-term trendlines too.  I'm looking for a bounce.  Economics are good, US/Israel/Iran sbre rattling bothers me.  Besides the obviuos, it drives up oil price adn increases inflation fears.

I'm trying to post some charts, hope this works.  I'm no TA guru but there's a good trend, especially when you have multiple touches, that's good confirmation.

[Ramsburg]

Looks like we are are ready to test the «ground» again... 

[Melf Elf]

The January, 2006 low of SPX 1245 held on May 24, but thus far, that only produced a Bear Flag rally back toward the declining 50DMA.

The Bear Flag broke to the downside on June 5.  The highs of June 6 and June 7 were failures at the bottom of the broken Bear Flag. 

SPX 1245 is key support.

[Ramsburg]

Well... What a session!
I must confess I was starting to have that strange felling of «pre-crash» on the air, especially after watching all session of DAX Xetra (German Index), and seeing it tumbling 160 pts (-2.9%) which is really not common this days...

The NDX was down to 1525 pts during the morning performing a «bloody» sell off, but during the afternoon everything changed (at least from a short term technical approach).
The index managed to close near the highs of the day, and above the ascending support, making a very nice candlestick: A Hammer
A candle like this, on situation like this, can be considered a potential sign of a Key Reversal Day, a day where an exhaustive selling power gains momentum, and even so loses the battle against a new buying force.

To know more about Hammers:
http://www.streetauthority.com/terms/hammer-hangman-candles.asp

Enough said, we still need a confirmation from the days to come, but its incredible how a simple candle can change the overall outlook of the all scene.

[Melf Elf]

Well... What a session!
I must confess I was starting to have that strange felling of «pre-crash» on the air,

Frederick,

That was looking very ugly until the reversal to the upside.  The NDX channel was broken to the downside and key support at SPX 1245 was broken.

The index managed to close near the highs of the day, and above the ascending support, making a very nice candlestick: A Hammer
A candle like this, on situation like this, can be considered a potential sign of a Key Reversal Day, a day where an exhaustive selling power gains momentum, and even so loses the battle against a new buying force.

Yes, that's a start.  It doesn't look as good on the weekly chart yet, though.  At the August, 2004 low (#2 on the chart) and at the April, 2005 low (#4 on the chart), we had long black candlesticks, followed the next week by Inverted Bullish Hammers, then rallies.  At the April, 2005 low, we had an Inverted Bullish Hammer, then a Bullish Hammer, then the rally.

Enough said, we still need a confirmation from the days to come, but its incredible how a simple candle can change the overall outlook of the all scene.

Right.  I think we're still okay if we sell off today toward the bottom of the channel and finish this week on a long black candle, but we'll need  something like a Bullish Hammer next week and maybe the week after, then the rally, like August, 2004 and April, 2005.

By the way, yesterday the QQQQ came within $0.16 of its Double Top Target IN PLAY.  That might be "close enough."   I'll post the chart in that folder.