From Oct 15th 2007 - SP500 on the verge of significant downturn

SPX 1546.91 -14.89At 13:41 Op 1562.25 Hi 1564.74 Lo 1543.59 Prev 1561.80


As much as the SP500 was oversold in mid-August, it is now as overbought. The recent move in the past 5-6 weeks has been on anemic volume (1.3 billion average NYSE and 1.9 billion average composite), needless to say, and it has reached an extreme overbought level on a MACD chart in which its faster MACD line is crossing below its slower. Also, in the most recent gain, the SP500 never made a genuine move above its previous high in mid July, which was on greater volume (1.6 billion average NYSE and 2.3 billion composite), and by and large, the premise that LBO's and rumors of LBO's were running rampant, which right now is not as likely.

I think a 5-10% (80-160 points) correction is looming in the index, most susceptible to this move will be tech equipment which has made staggering gains in the past 2 months, semiconductors where the SOX has formed a head and shoulders top in the past 6 months, as well as financials (banks and broker dealers) which have had a difficult time rebounding from their initial selloffs earlier this year and have broken through significant support levels. Banks and broker dealers will face harsh sell-offs due to credit crunch and exposure to bad debt structured issues.

SOX 486.41 -1.02At 13:27 Op 487.70 Hi 491.33 Lo 485.64 Prev 487.43

XBD 237.31 -5.07 iAt 13:42 Op 242.38 Hi 242.38 Lo 236.52 Prev 242.38


BKX 105.90 -2.07At 13:42 Op 107.97 Hi 108.09 Lo 105.66

From Jan 2nd 2008 - Dow Jones Industrial making Head & Shoulders top

INDU Up 13102.49 -162.33 iAt 11:53 Op 13261.82 Hi 13279.54 i Lo 13080.46 i Prev 13264.82

The Dow Jones Industrial Average has formed a head and shoulder top pattern (see chart above). As you can see, the left shoulder was formed in July; the head formed in October, after several federal reserve rate cuts; and the right shoulder formed in November, after additional rate cuts, and market anticipation of more rate cuts this year. This pattern is considered one of the strongest indicators of a top in an index and individual securities. Technicians look for a equidistant move from the "head" of the pattern to the neck line, and from the neck line down to a possible bottom. As such, one can anticipate a move in the DJIA to around 11,200. This formation has developed as several other technical events are running concurrently:

1. 50 day moving average is about to cross below the 200 moving average. Having already passed its 100 day moving average in mid-December, a move toward its 200 day MA was inevitable. This is significant because the 50 MA has not traded below the 200 day MA since November 2005.
2. The Dow Jones Transport Index continues to push lower, dropping 450 points in the past 3 weeks and is heading toward it 200 week MA at 4130, or down another 350 points from here. As written about in prior notes, according to Dow Theory, as the Transport index goes, so goes the economy and equities markets in general.
3. S&P500 (the best market index to follow, in my opinion) has made a similar move already, as the 50 day MA crossed below its 200 day MA in mid-December.
4. Gold is trading above $850, levels not seen since Jimmy Carter was POTUS, the Soviets invaded Afghanistan, and Americans were taken hostage in Iran; Crude Oil is closing in on 100 a barrel; Grains' prices continue to press higher (Corn, Soybeans, Wheat); Continued weakness in the dollar, despite the small bounce in the past few weeks. The dollar will probably stabilize over the course of the year and may in fact recover slightly in 2008, but it will be more due foreign banks cutting their rates than genuine demand.