Market approaching abyss on major trendlines, support

When the dust settles and we look back to see whether price action over the past several months led to the peak of the bull move that began in March 2009 or was merely a lengthy lull in the bull trend, it’s a sure thing many will attribute market "uncertainties" to worries over the U.S. Debt Crisis. And that’s even if the immediate debt threat is put off until tomorrow and the country continues to stumble along its economic highway.

Nonetheless, we’ve always been puzzled by something. If it’s true that the stock market is a forward-looking, discounting mechanism, why would something that has already been discounted be taken into account when the event actually occurs? What this question really boils down to is "What effect does a major news event have upon the market?" To highlight our skepticism the effect news has on the market, and we know some will throw up their hands in horror at the suggestion, three major historical events may offer some insight.

Pearl Harbor – December 7, 1941: When the Japanese attacked Pearl Harbor on a "Day of Infamy," as President Franklin Roosevelt termed the surprise attack, the U.S. stock market had been in a bear market since March 1937. The Intermediate Cycle had been negative since late July and the Short-term cycle since mid-September. And while the market was down the equivalent of about 700 points over two sessions after the attack, selling was into a short-term low. Just four months later in April 1942 during the some of the country’s darkest hours and nearly two months before the Battle of Midway that was the beginning of the end for Imperial Japan, the market made a major low and rallied until May 1946. Pearl Harbor was merely a downward blip amongst many in a primary bear market.

Kennedy Assassination – November 22, 1963: When President John F. Kennedy was assassinated in Dallas, Texas, the stock market declined the equivalent of about 350 points that day. But that sell off proved to be the low of a short-term decline. Selling terminated at a rising 200-Day Moving average in a primary bull market which began in June 1962 and that lasted until February 1966. On the long-term trend charge damage from the Kennedy assassination is virtually unnoticeable.

"9/11"-- September 11, 2001: When Muslim terrorists attacked New York and Washington D.C. the U.S. stock market was already in a primary bear market which had begun in March 2000. The Short and Intermediate-term Cycles were negative. While the Dow lost 685 points when the U.S. stock market opened September 17 after being closed for nearly a week, the Dow quickly lost nearly 700 points. But less than a week later the market put in place an intermediate low and rallied until late March 2002. A Major Cycle low was not made until October 2002, however. In this instance, also, and despite the horror of the day, 9/11 was merely another blip in an ongoing bear market.

Current – While it remains to be seen where the eventual high in the Major Cycle of this bull market will be recorded, it is nonetheless true that the long-term trend is still positive. Put another way, given the three previous examples, no matter what develops in the budget crisis, that action could prove, historically, to have no effect on the stock market except insofar as news from this event develops within extant trends. In other words, we do not think a negative outcome will cause a bear trend. Nor do we think a positive resolution will cause the market to rally to new highs.

The point of these three examples is to highlight the fact that the extant cyclical direction of the market is of paramount importance when a major event occurs and that the news event simply develops within the context of trends already in place, even down to the Minor Cycle. In short, we feel that "news" is often used as a justification that is unwarranted from the market’s point of view.

Closer to home, things were going bump in the night last week in overnight and overseas trading as foreign investors decided to head for the exits along with their stateside counterparts under the auspices of short-term negativity. When the five-session selling spree was over the S&P 500 Index was down on the week 3.9%, the Dow 4.2%, the NASDAQ Composite by 3.5%, and the Value Line Index the biggest loser with a loss of 4.8%.

S & P 500 Index with Cumulative Volume

What is now the main issue with the stock market is that not only have the major indexes pulled back from recent highs that could prove to be the top of the Right Shoulder of a potential Head and Shoulders Top, but all were last heading back toward key supports at potential Head and Shoulders Necklines. The NASDAQ Composite has not relinquished as much territory on the downside as the other indexes, but is nonetheless moving in the right direction. At the same time, the indexes are closing in once again on 200-Day Moving averages which have historically provided long-term statistical and psychological support. And last, long-term uptrend lines that have been developing since March 2009 are in jeopardy.

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