Technical indicators show that momentum is still negative
Last week I wrote that most market and economic fundamentals looked weak. In the meantime, the president announced an economic stimulus plan and the Federal Reserve made a surprise announcement of a 3/4% interest rate cut. Unfortunately the reaction from Wall Street and from investors was not overwhelmingly supportive. Instead of rallying on this news, the markets actually saw a couple days of sharp declines.
The reason for this drop is undoubtedly because Wall Street is worried that the situation could be much worse than anticipated if the Fed and the president are willing to take such actions before a recession has officially been declared. Wednesday the market staged a dramatic turnaround and finished on the positive side. There was additional follow through on Thursday. But technical indicators are still showing that weakness is dominant.
The chart below shows performance of the Nasdaq over the past three months. I’ve used a method called “candlestick charting” because I think it gives a quick visual understanding of this negative market period.
Candlestick charts reflect the open, high, low, and close market prices over a certain period. Candlesticks are composed of the body (red or white) and an upper and a lower shadow (wick). The wick illustrates the highest and lowest traded prices and the body the opening and closing trades. If the stock or index went up, the body is white, with the opening price at the bottom of the body and the closing price at the top. If the stock or index went down, the body is red, with the opening price at the top and the closing price at the bottom. A candlestick need not always have either a body or a wick.
As you can clearly see, over the past three months, the red candlesticks occur much more often than the white. And except for the past couple of days, volatility has been much greater on the down sessions. You can also see that the Nasdaq declined more than 20% from the high it reached in October. I’ve included the Dow (gold line) and the S&P 500 (blue line) for comparison. These indices have also seen significant losses over the past 12 weeks.
On the bottom portion of the chart, I’ve included three separate indicators. Each of the three shows me that although the market has turned up, momentum remains negative. The first of the three indicators is a stochastic oscillator. It crossed over and turned positive on Jan. 22. That indicates we are likely to see four or five days of upward market movement.
The middle indicator is a moving average convergence divergence (MACD). This indicator is still showing that weakness is predominant. When the blue and brown lines cross and turn upward, that will be an indication that market momentum is shifting toward the positive again.
The bottom indicator is a Relative Strength Index (RSI). In order to have enough strength to sustain an uptrend, the RSI needs to trend above the 50 level. Right now it is at about 30.
So each of these indicators is showing a slight upturn in the market, but not enough to provide incentive to jump back in. Combined with the weak economic fundamentals, the prudent course for investors right now would seem to be to remain on the sidelines.
Of course, no one can predict the future and it is possible that the market might stage an impressive rally from this point. But if the indicators are correct, there will be more down days in the near future.
F.S.
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