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Stocks dig a deeper hole -- when do we come up for air?

After a week of epic volatility, stocks ended the week on a positive note; nevertheless, it wasn't enough to turn a loss into a gain. The S&P 500, for example, still ended the week down 1.63%.

Last week I reviewed the moving average and trend analysis charts and declared that we were at bearish extremes not seen since the March 2009 market lows. Let's see what they say this week.

The view from Alert HQ --

For those readers who are new to TradeRadar or who don't remember what this is all about, the data for the following charts is generated from our weekly Alert HQ process. We scan roughly 6200 stocks and ETFs each weekend and gather the statistics presented below.

In this first chart below we count the number of stocks above various exponential moving averages and count the number of moving average crossovers, as well. We then plot the results against a chart of the SPDR S&P 500 ETF (SPY).

The number of stocks above their 50-day EMA (yellow line) has improved so little the change is pretty much imperceptible in the chart above. In the meantime, the number of stocks whose 20-day EMA is above their 50-day EMA (magenta line) has continued to fall, reaching another post-2009 extreme.

With the over-sold situation getting even more over-sold, it is hard not be looking for a snapback rally while being terrified that another leg down might just as well be in store.

The next chart provides our trending analysis. It looks at the number of stocks in strong up-trends or down-trends based on Aroon analysis.

On this chart we have another post-2009 record being set: the number of stocks in strong up-trends (yellow line) has dropped to a new low. Having set a record for number of stocks in strong down-trends the previous week, we see that measure has thankfully declined this week though it remains at a very elevated level.

Conclusion --

Chart damage has been so severe it is questionable whether one can use technical analysis at all to gauge this market. Still, we have to work with the tools that we have.

Last week we felt that the depths to which stocks were over-sold implied we wouldn't go much lower. Actually, we do go lower, over 5% lower. A strong rebound on Thursday and a more modest gain on Friday allowed stocks to come back part of the way.

The question investors will have this weekend is whether the two good days at the end of last week portend an improving tone for the market. Can the two-day rally continue or will it run into a brick wall?

Among the brick walls that we have to worry about are the following:

  1. Former support levels now look like resistance. For the S&P 500, it means that a rally could easily stall at the 1250 to 1260 range.
  2. For all major indices, the 50-day moving average has rolled over and the 200-day moving average either has done so or is on the verge of doing so. Bearish crossovers have occurred for the S&P 500, the NASDAQ Composite and the Russell 2000.
  3. European sovereign debt woes remain unresolved and European banks are under pressure
  4. Soft economic numbers, stagnant job growth and downbeat sentiment cast doubt on the ability of the U.S. to avoid recession or at least an even softer patch than we are currently experiencing
  5. The political will to impose austerity while the economy struggles does not bode well for GDP, jobs or corporate profits

Not to be completely negative, it is important to point out that there are still some positives at work:

  1. The soft economic numbers we have seen lately, though disappointing, still reflect growth at a slow pace. That is clearly better than numbers that reflect contraction. 
  2. There are many analysts who say stocks are now bargains and perhaps they are if the economy doesn't deteriorate further.
  3. In the vein of "don't fight the Fed" we still have low interest rates (and will through the middle of 2013 according to the latest Fed statement) and a commitment by the Fed to use what tools it has to support the economy. 
  4. To his credit, Obama is finally trying to turn the conversation to jobs and we can only hope that something beneficial comes out of that (though Americans have now been trained by their leaders to be cynical of all such efforts emanating from Washington).

All in all, this is a tough time to make predictions. Just be careful out there.

Disclosure: none


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