February 12th, 2006

Stock Market Indexes: a Current Analysis

I return from a glorious 9 days of skiing with the best snow in years only to find myself in the worst NYC blizzard on record. In Colorado I couldn’t be happier; today my back aches from shoveling. I guess that’s when the saying “beauty is in the eyes of the beholder”gains new relevance. It’s also appropriate when trying to get a sense of the market’s health when looking at the major market indexes.

Standard & Poor’s 500 (.SPX):

The day I last wrote of the S&P500, in my January 22 posting, the market had just suffered a major decline. I concluded by saying that:

“a decline as large as Friday’s is not that unusual and has happened as often in the middle of a bull market as in a bear market.”

Fifteen trading days later, the index remains essentially unchanged (1266.99 today vs. 1261.49 on 1/22/06). But on closer analysis, some significant differences become apparent:

  • some may say that the index is part-way through completing a head-and-shoulder sort of top with a neckline at the 1249 support trendline.
  • the 50-day moving average has been violated and the 90-day moving average is converging with the 1249 trendline and is also at risk of being violated.
  • if there were a bounce at the support trendline, then on retesting the line, the major 180-day moving average could also be violated.

That involves many “if’s” but, if all come about, it could mean the beginning of a major market correction which could carry the SP-500 down 5% to 1200 in the best case or 8 1/2% to 1155 in the worst case.

Nasdaq Composite Index (.IXIC):

Some may say that the Nasdaq Composite index, like the SP-500, is in the process of forming a head-and-shoulder top pattern with a neckline at 2213, just below the upper boundary of the long-term channel boundary that began in 2001-02 (see my January 19 post).

  • the Nasdaq Composite successfully broke through the upper channel boundary and appears to be retracing and testing that trendline as a support
  • here, too, the 50-day moving average was violated with the 90-day moving average trailing behind at 2213 and 180-day moving average at 2175. Both are critical possible support tests
  • the major support is the lower channel boundary currently at 2105, or 7% below current levels. Violation of that support has dire consequencies for the Nasdaq index.

Dow-Jones 30 (.DJI):

It’s hard finding a causal explanation but the Dow Jones 30 Industrials is the one index that appears to be attempting to breakthrough a resistance trendline at 10955, a trendline that originated at the high set in March 2005. Perhaps this struggle reflects the fact that large caps, as reflected by the DJ30 have lagged the stocks in the other two indexes.

In sum, each of the major indexes appear to be at a turning point and struggling to break through significant upside resistance. It will take forces outside market internals to launch new upside momentum.

Subscribe below or click here to learn more about help for navigating turbulent markets.