We've reached the point where Wile E. Coyote had gone over the cliff but he doesn't yet realize it. As we all know, in television land they sometimes find a way to put him back on the cliff. Do any of you remember how they resurrected Bobby Ewing on Dallas? Didn't they kill him off one year only to have Pam find him in the shower and discover it was all a bad dream? Maybe I'll wake up and find it was a bad dream but didn't the Dow break very long term support in the form of the 200 week moving average last week? If that's the case, it's going to take the very best sleight of hand by Lance Burton to repair that chart.
I'm going to repeat what I told in January and again in March. If you take a close look at long term charts from this decade you'll find pockets of time where the 200 week moving average was broken but within a few weeks the markets turned back up. On the one occasion it dropped and didn't make a quick recovery, the markets tanked for the next year. So unless the Dow can recover, let's say by the time we get back from our July 4th vacations, we will be confirming a long term bear market.
This time it does feel different. Why? It was two or three weeks ago where I came here and told you I felt it the extraordinary circumstance had materialized that could plunge the market below long term support. I've told you that since January but didn't know exactly what it would be. I think $4 gas did it. I think it puts a chilling effect on the economy. We've all learned that it is the mood of the crowd that determines market behavior. Bear markets are characterized by contracting behavior. On the macro level, a tariff war is the type of contraction that seriously hurts commerce. On the micro level, people not wanting to leave their neighborhood unless they absolutely have to is just as serious. This isn't just a phenomenon out west where people drive up to 60 miles one way to work everyday. Back on Memorial Day weekend I covered the 'stay-cation' phenomena in New York City where the locals prefer to spend $4 on a round trip ticket to go to the beach at Coney Island as opposed to the nice shores of South Jersey. Personally, I can't recall anything like this ever happening to our economy in my lifetime. Yes, I did sit in gas lines during the 1970's, but now the fuel is available. I just prefer to stay closer to home. I doubt I'm the only one that feels that way.
That being said, my concern or fear of what this means to the economy isn't being translated to the stock market. Last week, we actually saw put-call readings at their highest level since March. We were actually in a position, at least from a sentiment/fear perspective of putting in a bottom. But someone either decided to buy the dip or insure against the possibility of a rally. Once that happened, conditions that could have created a bottom evaporated. So we have an interesting paradox working. We have the worst economy in 30 years yet collectively we are in denial about it. Have we come to the point where we just don't want to open the brokerage statement every month? Perhaps we won't be waking up from this bad dream anytime soon.
That being said, we come to the end of the quarter window dressing season. This is where mutual funds will either clean out their losers which could give us a sharp spike down and a reversal or we'll have a mini buying spree to end the quarter. Anyway you slice it, we are due for a bounce, even if it is just for relief of an oversold condition. I happen to like the setup on the NASDAQ where we are sitting on the 61% retracement of the bear market rally. On an hourly basis, the leg down from June 5-12 spanned 34 hours and the leg down from the 17th-27th was 61 hours. There is symmetry there. The bounce from the 12th-17th was 16 bars and when we divide 61 into 16 we get a 3.81 extension (38.2% Fibonacci derivative). Don't get too excited over these calculations. They are not the kind of windows that create bottoms. More likely, it’s the kind of window that creates a dead cat bounce. But since we are at the end of the quarter in a vacation shortened week, we could get more of an elongated bounce.
Turning to the Dow, our best chance at redemption came at a 1.618 extension of that final leg up from the August low to the October high. If that calculation validated, the action would have stopped going down within a couple of points of 11,486 but the low was 11,298 which at almost 200 points lower is too big a margin for that calculation to work. In addition to the 200 week moving average, the Dow also violated a key 38% retracement of the whole rally from this decade which was back up at 11,539. I suppose I can take solace in telling you that I predicted that October pivot would be the most important turn of the year if not the decade. It was likely an industry exclusive when I told you that in this space, this magazine and in my newsletter nearly six months before the fact. Time has proven everything I said last year to be true.
Look at the Dow, next key support is 10,700. That is the July 2006 low. The way this chart is configured right now it's unlikely Bobby Ewing, Lance Burton or should I say Ben Bernanke is coming along to save it. One thing to take out of that July 2006 low was the high degree of fear if you remember.
The NDX is still in decent shape but technically can drop another 100 points before enough serious fear would creep into the market to create a serious bounce attempt. Finally, the SOX came down to our target area of 353-369 at a Lucas 199 hours and is also attempting to bounce. The NASDAQ is down near 61% and even if we were to bounce, it has retraced too deeply into the rally to really amount to much.
I've spent much of this space on sentiment again. The reason for this is we've broken important support levels before and the only condition that differentiates one support area from the next is how market participants feel about it. This is the clue we need to determine if conditions are ripe for a real bottom. As of Sunday night, conditions for a true bottom are not present.
Those of you who've been sitting on the fence about taking a subscription at my new web site should consider how the Fibonacci Forecaster gave you world class cutting edge information last year concerning the October pivot months in advance. The information kept you long when others were calling for a premature top and recognized the significance of the turn when it finally came. My first warnings were in April 2007 and other technicians only came on board with similar information as early as August. I'm proud to say my product beat the best by four months. Subscribers get the same cutting edge charts that are characterized by my book. I'm going to be on vacation next week, so this column will return in two weeks. On Friday July 11th I'll be back on with Sinclair Noe at 1510 KFNN Financial News radio in Phoenix at 2:20 PST. Those of you around the country can listen on the Internet.
