Now See the Stock Market Near the Edge, Grasshopper ~ The Risk Averse Alert

Saturday, April 19, 2008

Now See the Stock Market Near the Edge, Grasshopper

Nothing is set in stone. This includes any outlook I express, whether previous or this moment...

Up to this point I have been supposing a stock market melt-up is in store ... once its multi-month decline, begun October, 2007, is complete. I continue to believe this "has to be" the more likely probability. However, I am more suspicious than any time before.

Today, I want to give you a cursory view of the big picture. This simply summarizes why I have been supposing a bottom to the stock market's multi-month decline is at hand (if not already in place on March 17, 2008). Behind the scenes are a number of technical things an Elliott Wave Guy considers. I don't go there. I dazzle you with volume and price-RSI, and offer "like from like" ideas in a simple way. On one hand I am trying not to numb your mind. On the other I am asking you think.

On Wednesday, March 26, 2008, I wrote, "The more I look at the big picture — the nearness to which all major indexes are to points at which, were they to fall below, the stock market might likely thereafter collapse spectacularly — the more I am persuaded [the March 17th] low represents something of a strong floor."

Have a look at this.

NYSE weekly

As you can see the NYSE Composite is not far above its long-term, rising trend line. In fact, you should also go back to my commentary on April 4, 2008 and take a look at the mark-up drawn on the two year chart of the NYSE Composite. There I present a scenario where the stock market's multi-month decline would complete right about where you see the NYSE Composite's long-term, rising trend line (above). Right in the vicinity of 7600.

So, underlying, long-term, buying support exists not far below present levels.

This long view gets even more interesting looking at the NASDAQ Composite...

NASDAQ weekly

Goodness. Long-term buying support is at hand. RSI has once again turned higher from the very same area it has already bottomed several times over the past four years, and that suggests long-term support will hold.

So, this essentially is the preliminary background to my March 26, 2008 comments suggesting a nearby floor underneath the stock market. You see everything you really need taking the long-term trend line into view.

Per supposing a market melt-up might be at hand, here's a view I take looking, again, at the NASDAQ Composite...

NASDAQ weekly

First, consider this index's range-bound, rising channel during 1999 and observe what followed. Note how as the NASDAQ Composite fluctuated between higher highs and higher lows, its RSI diverged. However, rather than forecasting weakness, things were winding up.

You see the same kind of thing occurring over the past four years — same range-bound trading ... with an upward bias and RSI diverging.

There's one caveat to note, though. RSI has on a number of occasions dipped below 50, where sell-side strength is in command. This never happened in 1999. What significance this represents only suggests underlying buy-side strength is inconclusive. It's a red flag, and we should not ignore it.

However, as I have presented above, underlying long-term support is at hand.

Now let's take a closer look at the NASDAQ Composite's RSI picture (above) from a different angle. Zero in on the price-RSI divergence registered in October '02 when the index bottomed. Also note RSI's marked improvement — buying and selling strength moving in balance ... supply meeting demand ... i.e. at 5o — as the index fell from December '02 through March '03. We ought to expect the same kind of thing in the present period.

So, I suggest there's more work to be done ... buy-side strength needs to reveal itself. That's one reason why I have been supposing the March 17, 2008 low probably will be re-tested.

This is even better presented in the NYSE Composite Index...

NYSE weekly

Price-RSI performance since the Jan. '08 low appears almost a carbon copy of Jul. - Dec. '02.

At the very least, then, a re-test of Jan. - Mar '08 low appears a reasonable possibility. Likewise, a rapid swoon to the vicinity of 7600 and an equally quick reversal (on heavy volume) would fit, too. This is something like how things unfolded at the conclusion of the LTCM fiasco back in Q4 '98. You see this at the very left of the above chart.

And could there be worse?

That's what I fear.

However, when things like this arrive in my email, I worry less:

News like this, I suspect, simply is premature. And ... despite believing the Dow Jones Industrials could fall to the area of 3600 sometime over the next 3-4 years, I am going to do my level best to stay away from using the language of Armageddon. Indeed, I believe the Dow could fall to 3600 tomorrow and, still, the stock market would remain in a long-term up trend.

Per the pending market melt-up I have been forecasting... expect a percentage gain in the NYSE Composite greater than what occurred off its October, 1998 bottom (the index rose approximately 40% into its Y2K top) ... and a percentage gain less than what occurred in the NASDAQ Composite over this same period (for all intents and purposes, the NAS practically doubled).

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© The Risk Averse Alert — Advocating a patient, disciplined approach to stock market investing. Overriding objective is limiting financial risk. Minimizing investment capital loss is a priority.

Analysis centers on the stock market's path of least resistance. Long-term, this drives a simple strategy for safely investing a 401(k) for maximum profit. Intermediate-term, investing with stock index tracking-ETFs (both their long and short varieties) is advanced. Short-term, stock index options occasionally offer extraordinary profit opportunities when the stock market is moving along its projected path.

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