The major US stock market indices have lost 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, a veteran market technician, owner of the Institutional View research service and once a contributor to Barronssees several disadvantages ahead too
Dow Jones Industrial Average,
given the lack of shares that withstand this year’s selling pressure.
Unlike fundamental analysts who try to determine asset value by studying financial or economic factors, technicians examine chart patterns and trading volume and other statistics to identify likely turning points. “When the markets are making a meaningful turn, you find that the action in the index camouflages strength or weakness below the surface,” he says.
At the moment, there is no camouflage: things have been ugly, over and under.
There is no evidence that more stocks are reversing their downward trends as the broad indices fall, he says. Nor has there been a “meaningful decline” in the number of stocks hitting new lows, or a notable increase in the percentage of stocks traded above their 50-day or 200-day moving average. “Until the internal conditions of the market improve, any rallies are likely to be short-lived, like a tropical rainstorm,” he says.
Technical analysts also study support and resistance levels, points where investment demand or supply has previously stopped sales or rallies. Addison sees support for the Dow around 29,000 to 30,000; the blue-chip average was around 31,950 on Friday.
Now that the S&P 500 has broken below 4050, the downside risk is 3800 and potentially 3600 based on his reading of the index chart. A drop to 3800 would mean a loss of 4.8%, based on Friday’s price of 3990.
Addison has spent a lot of time studying
a market capitalization-weighted index of the 100 largest non-financial corporations listed on the Nasdaq, and a proxy for the growth stocks that drove the bull market to staggering heights. At the last 11,945, it is approaching support, he says. “We could see the Nasdaq 100 begin to stabilize around 11,000,” he adds, noting that the index spent about six months, from last June to December, in a trading range of about 10,500 to 11,000.
The Nasdaq 100’s 200-week moving average, which defines the long-term trading trend, is 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 average has provided support since stocks rose from their 2009 low point after the financial crisis. “The big indices have not outperformed them in the last 13 years,” he says.
If the Nasdaq 100 were to break below its 200-day moving average in a decisive way, it could have “ground-breaking consequences” for the stock, Addison says.
Have we not had enough of them already?
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