Dow Leads Stock Market Down

By: Kingsley_Anderson

“An impartial study of history reveals that the more government intervenes in an attempt to minimize the severity of cycles, the more extreme and violent they seem to become.” Richard Russell

Well, I'm back from court. It looks like I missed a lot. Apparently the market does not like the stimulus package. It was certainly not a “Turnaround Tuesday.” The one saving grace is that the market decline occurred on lower volume. However, when heading downward, volume is not as significant an indicator as when the market is heading higher. So, even this market positive loses some of its luster.

Throughout history, many economics have argued that government meddling in business affairs only delays the inevitable- or makes things worse. More recently, the famed value investor Jim Rogers indicated that the banks should have been allowed to fail as opposed to keeping them on life support. Time will tell whether he is correct. But in the meantime, he sure sounds prophetic.

It certainly looks like the DJIA will retest the November low. If we do in fact undercut or continue downward, pay careful attention for divergences in the different indicators, such as the advance/decline line, the percentage of stocks trading above their 50 day moving average, MACD, and RSI. If the DJIA makes a new low, these indicators should do likewise. If this does not occur, then a divergence exists, indicating that the trend is slowing. Keep in mind that this turn can take some time. In fact, in November, when the DJIA made its new low, numerous indicators were flashing a divergence with the index.
If the retest fails, support exists in the 6700 area. While the S and P 500 is in better shape than the DJIA, its future does not look promising. As indicated by the chart above, a trendline and support area were both breached yesterday. It is hard to make an argument why the S and P 500 would not retest the November low.

Dow Theory is also not giving the Bulls much hope. In a nutshell, the theory states that if a new low is made on the DJIA and the Dow Jones Transportation Index, then the downtrend continues. The Transportation Index already broke below its low. Based on yesterday's action, it seems that the DJIA will follow suit, confirming the downtrend.

Positions: None

By Kingsley Anderson

http://tradethebreakout.blogspot.com

Kingsley Anderson (pseudonym) is a long-time individual trader. When not analyzing stocks, he is an attorney at a large law firm. Prior to entering private practice, he served as a judge advocate in the U.S. Army for five years and continues to serve in the U.S. Army Reserves. Kingsley primarily relies on technical analysis to decipher the markets.
Kingsley's website is Trade The Breakout (http://tradethebreakout.blogspot.com)

Copyright © 2009 Kingsley Anderson - All Rights Reserved
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