In times of market stress I often get asked if technical analysis still works in such markets. I often wonder if the folks who ask this question are really asking if lines drawn on an index chart matter in times like this. I do not think technical analysis is about lines on a chart and so-called levels.
I think technical analysis is about indicators. I think if we see well-watched levels broken on the indexes and there are fewer stocks making new lows, that matters. If we see levels broken and sentiment gets extreme, that matters. If we see levels broken and momentum is slowing, that matters. If we see improvement in breadth as indexes fall, that matters. I think that's analysis. I don't think drawing lines on a chart is analysis.
I am sure I will get plenty of nasty emails for that comment!
In the post 1987 crash period, the market was wild. It swung up and down constantly. And we had no circuit breakers back then. I know everyone who looks back at that chart thinks to themselves: Oh, it was so easy to buy. But it wasn't. There were rallies and tests and rallies and tests. And each trip back down saw momentum wane and positive divergences. Because that's how markets go through the process of bottoming.
A low is not a bottom. Try not to confuse the two. We had a low in October 2008. We had another one in November 2008. But we did not have a bottom until March 2009. A bottom is a process. After the initial low where we see the extremes we should have a rally. Then we should have another trip back down. Then another rally, then another trip back down. In other words, that chart from 2010 that I have been highlighting shows the process.
What the market needs is the first rally. In 2010 it did not arrive until five or six weeks after the high. We are at week five or six now, depending on how you count when the high was. And I do think we should get a rally this week.
One reason is that for eight-straight trading days, we have not seen an increase in stocks making new lows. The 10-day moving average has turned down as well.
The put/call ratio has been high and rising on a daily basis, but after Monday, it finally rolled over on a 10-day moving average. That's the first time we've seen that since the downturn started.
We also saw the Russell 2000 refuse to make a lower low. The Transports, too. The Semis as well. Can they last? Nothing is written in stone, especially since the credit-related exchange-traded funds of JNK (JNK) and HYG (HYG) continue to act so poorly. But at some point, the selling dries up and we rally. Once we get the initial rally, we can begin the bottoming process. I'd like to think we can get that rally this week.