Thursday, January 10, 2008

Technical Thursdays: What a Decline to 1360 Means – Revisited

Bernanke pledges to cut rates. And from a technical analysis perspective not a moment to soon.

The recent market corrections – four since the summer of 07 – are taking their toll on the technical conditions of the market, most notably in the area of the highly reliable mega trend tracking tool - Moving Averages Principle.

As the above chart* shows, the current price of the S&P 500 is below both its 50 and 200 day moving average. This is not unusual as the crossover of price below both moving averages has occurred several times during this bull market. Rather, the key risk factor, one that has not occurred once since the bull market began nearly 5 years ago, has to do with the 50 day in relation to the 200 day AND the slope of each.

Should the stock market fail to stage some sort of a meaningful rally, along the lines of reversal of the decline experienced thus far, the 50 day will cross decisively below the 200 day and, importantly the slope of both averages will point downward.

This risk was noted several blog entries ago (“What a Decline to 1360 Means”) and one that would necessitate a reduction in equity market exposure despite its obvious whipsaw potential (also noted previously). What makes this potentially negative event particularly scary is the fact that the S&P 500 is not alone.

According to the Moving Averages Scorecard that covers 20 different segments of the global equity market and US economic sectors (weekly report, subscription required), an increasing number of sectors and segments are now borderline negative, much like the S&P 500 is.

Investment Strategy Implications

The technicals are the big fly in the bullish ointment, assuming one buys my decoupling/valuation scenario. Time will tell if the Fed will ride in and rescue this technical damsel in distress.

* click image to enlarge

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