Major U.S. stock indexes are down about 12% to 25% this year, a painful setback after two years of gains. Time to buy? Not so fast, based on a technical analysis of current market conditions.
Andrew Addison, seasoned market technician, owner of the Institutional View research service and occasional contributor to Barronssees more downsides ahead for the
Dow Jones Industrial Average,
given the shortage of stocks resisting the selling pressure this year.
Unlike fundamental analysts, who try to determine the value of assets by studying financial or economic factors, technicians look at chart patterns, trading volume, and other statistics to identify likely turning points. “When the markets are about to take a significant turn, you find that the index action camouflages strength or weakness below the surface,” he says.
For now, there is no cover-up: things have been ugly, up and down.
There’s no evidence that more stocks are reversing their downward trend as broad indices fall, he says. There has also been no “significant contraction” in the number of stocks hitting new lows, or a noticeable increase in the percentage of stocks trading above their 50- or 200-day moving averages. “Until market internals improve, any rebound is likely to be short-lived, like a tropical rainstorm,” he says.
Technical analysts also study support and resistance levels, the points at which investment demand or supply has stopped selling or rallying in the past. Addison sees support for the Dow around 29,000-30,000; the blue chip average was around 31,950 on Friday.
Now that the S&P 500 has moved below 4050, the downside risk is 3800, and potentially 3600, based on its index chart reading. A drop to 3800 would imply a loss of 4.8%, based on Friday’s price of 3990.
Addison spent a lot of time studying the
a market-cap-weighted index of the 100 largest non-financial companies listed on the Nasdaq, and a proxy for the growth stocks that have driven the bull market to dizzying heights. At a recent 11,945, it is approaching support, he says. “We could see the Nasdaq 100 starting to stabilize around 11,000,” he adds, noting that the index spent about six months, from June to last December, in a trading range around 10,500. at 11,000.
The 200-week moving average of the Nasdaq 100, which defines the long-term trading trend, sits just below 10,700. The last time the index approached this support level was in March. 2020, Addison says, when it fell as low as 6770, near the then 200-week moving average of 6600. The 200-week moving averages have provided support since stocks rose from their 2009 lows after the financial crisis. “The major indices haven’t violated them in the last 13 years,” he says.
If the Nasdaq 100 were to break below its 200-day moving average decisively, it could have “shattering consequences” for stocks, Addison says.
Don’t we have enough already?
Write to Lauren R. Rublin at [email protected]