Charles Hugh Smith - Of Two Minds
Dow Jones Industrials 9,240, Here We Come (November 30, 2010)
Six charts illustrate a weakening stock market.
Nobody knows what will happen in the future, but it's fun to predict anyway. With that caveat: Dow Jones Industrial Average (DJIA) 9,240, Here We Come. That's about a 16% decline from its current level around the psychologically important 11,000 level.
What is the basis of my foolhardy prediction of a 16% decline in the stock market? Let's start with a 10-day chart of the DJIA, which clearly shows the Plunge Protection Team's rapid backfilling of any decline. But alas, the downtrend is painfully obvious:
(http://www.oftwominds.com/photos10/DJIA-10-day.gif)
If we look at a 5-year chart of the DJIA, we see unmistakable signs of weakness. Despite a nominal new high in November, RSI and MACD are both showing major divergence, declining even as price hit new highs.
(http://www.oftwominds.com/photos10/DJIA-5-yr.gif)
The bands of support and resistance are clear as well, and the 9,240 target is solidly within the lower band. The resistance-support between 11,000 and 11,300 goes back to 2006 and even earlier to 2001 (not shown).
If the DJIA busts through 11,000, it's look out below.
As I have noted here numerous times, the US dollar (DXY) and the US stock market have been on a see-saw: when the dollar drops, stocks rise, and vice versa. Here we see the US dollar in a breakout mode, with a bullish cross of the 20-day moving average through the 50-day MA:
Though the Volatility Index (VIX) has been muted compared to its rampage higher in the Eursozone Debt Crisis Part 1 in May, we can discern a rising MACD and other evidence that volatility may not stay low.
The megaphone pattern suggests an increase in uncertainty as the swings up and down get more violent: the volatility of volatility is rising.
The S&P 500 certainly looks like it's traced out a big fat double top, and the indicators are diverging massively from the "happy story" rally. Price won't stay trapped between the 20-day moving average and the 50-day MA for long, and thre probing below the 50-day that occurred yesterday looks like the skirmish line of a full assault.
http://www.oftwominds.com/blognov10/DJI ... 11-10.html (http://www.oftwominds.com/blognov10/DJIA-9240-11-10.html)