Teetering on Trendlines

 | Sep 22, 2011 | 7:00 AM EDT  | Comments
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Sure, we can talk about the overbought market, or the way it fell apart after the Fed's decision to do exactly what it had said it would do. But my guess is everyone will be discussing the trendlines, so we may as well cover those.

It doesn't matter which index we look at -- they are all sitting right near or right on the uptrend lines of the lower channels that I've discussed plenty often. Let's begin with the Russell 2000, since that index has been the weakest of them all. As a follow-up, there has been no change in the direction of this index relative to the Nasdaq, so that trend still remains.

That's the short-term uptrend line. Let's call it 660-ish. A break of that would measure much lower, into the 570 area. But if we look at a longer-term uptrend line, we find that it comes in around 620. So the layers to watch are 660, the short term uptrend line; 650, the August low; and 620, the long-term trendline.

On the S&P 500 the short-term level is around 1160, while the longer-term one is around 1130. On the Dow, meanwhile, are a short- and long-term levels at around 11,000 and 10,700, respectively.

However, I believe the Dow Jones Transportation Index is what everyone has their eyes on. Was it really only two weeks ago that I thought the transports were making a head-and-shoulders bottom? The index proceeded to zoom up more than 10%, which shocked even me. I thought resistance at 4600 would halt the move, but the index managed to get all the way to 4680 -- and now it has collapsed.

Now the transports are showing short-and long-term trendlines at almost the exact same spot: roughly 4200. Considering the very fact that one of these is long-term, I would give the index a bit of leeway here -- it could break 4200 (i.e., get a thicker pencil) without an accompanying collapse. Still, as you can probably see, a break of that level -- without a recapture of that level -- would be problematic.

There is obviously some support beyond that point, at 4100, but the next measured target would be down in the 3800 area. About the only potential good news here would be that, if the transports broke to a lower low without an accompanying move in the Dow industrials, that would provide a Dow Theory non-confirmation.

Statistically speaking, Wednesday's decline was pretty much in line with what we have seen lately: Breadth was negative all day, even when the S&P was green. Sentiment remained bearish, as well. I suspect that, in the next day or so, we will hear so much chatter on the global economic slowdown. That's when we'll have confirmed that these economically sensitive stocks are grossly oversold.

The question is whether the safety stocks will roll over. Among these stocks that have held up well in this decline, I believe there is a good chance that, even some among these will have to give way toward the end.

I realize this comment will make everyone think of Apple (AAPL) -- but I am thinking of some of those dividend-paying defensive stocks, such as Kellogg (K). To me, this chart looks asif a break of that uptrend line should bring about a retest of the August low.

So, to reiterate, in the coming days everyone will be watching those trendlines.

 


 

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