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Getting Closer to the Bottom ? June 2, 2012

Posted by Tom in Thoughts.

It’s been a tough week to be invested, but let’s get away from the news cycle and look at the charts.  The chart below is of the NASDAQ Composite Index, I use that because it is a broader index (Dow Industrials is only 30 stocks, S&P 500 are the 500 largest corporations).

chart courtesy of MetaStock, Equis International; used with permission.

Two things to point out here. First, notice that the volume on Friday (bar #2) while substantial, is significantly less than that of bar #1.  Question: Is selling beginning to dry up?  Certainly there was heavy selling on Friday, but not nearly as much as some of the preceding down bars.  It’s looking like most institutions were already out of this market (reasonable), and perhaps only the few left in were getting out.  IF that’s the case, I’d expect to see early reactionary Selling on Monday morning (the small retail investors panic selling), then stabilizing and building a base (going horizontal).

Second, looking at the support levels (horizontal lines).  With this scenario, building a base between 2740 to 2860 may be a logically outcome over the next 2-3 weeks.  That would set the stage for a late summer rally.  That would surprise a bunch of folks, wouldn’t it?

Now a news item could totally blow this idea out the window, but keep in mind that the issues in Europe and the US are not new, and they are not going to be resolved in the next 6-12 months.  This market (and the pros) are counting on an over reaction to what is (actually) already known, driving the prices down, so they can re-enter at lower levels.  After all the price of Apple stock was getting rather high . . . why not lower it ? 

Keep an eye on the price structure.  Once we stop seeing lower lows and highs, and begin seeing higher highs and lows, especially on good volume (does not need to be high volume), then we’ll have some strength coming back into the markets.  Likely, the small cap stocks will lead the way, so I’ll be watching the Russell 2000 Index (very broad small cap. index).  Yes we can go lower, but we don’t “have to”.  Stay open to all possibilities, especially when everyone else is calling for gloom & doom . . . . it’s rather late for that now.

Hope this helps.  Please feel free to post comments (at the top of this post).  Problems with RSS feeds ?  World Press tells me that it’s caused by different browsers, they only support Internet Explorer, so Chrome and FireFox may have issues.  Sorry, nothing I can do about it.  Note I will have a new monthly “big picture” newsletter posted under that tab by the end of the weekend.     Press On and have a Good Week.

Post Script:  Please note that this market IS currently in a down trend.  The senerio above is just that, a possible senerio.  (I like to anticipate what the market may do while I am currently with the trend, that way If the senerio is confirmed, I’m not just starting to study it but reacting to it.)  So . . . as the British would say: “Wait for It !”; that is wait for confirmation of a change & be ready.   🙂


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