Some key trend indicators are approaching levels that have marked some substantial bottoms during the 18-month U.S. bear market.
The problem is, there may be one more leg down first, perhaps equal in length to Monday’s big decline.
The indicators are ADX and MACD, and of the two, ADX is probably the more important. It moves up during a strong trend, and on the major indexes, it has tended to peak at around 40 when the market bottoms.
We’ll start with the Nasdaq, which surprisingly, is the most promising-looking of the three major indexes (see chart below). The daily ADX reading on the Nasdaq is currently 36.3; it bottomed in April just about at 40. Also, the Nasdaq is showing a positive divergence in MACD and On Balance Volume (OBV); essentially, those indicators are setting a higher low while the index sets a lower low. Techs may finally be starting to outperform the broader market.
The S&P (see chart below) is showing an ADX reading of 34; it bottomed in April at about 44. The index has a negative divergence in OBV, however; since volume tends to lead price, that’s not a great sign longer-term.
The Dow (see chart below) has an ADX reading of 31.2, and has previously bottomed at about 36-38. However, the index has a negative divergence in OBV, and could have one on MACD by the time the decline is over. Given that the Dow and Nasdaq are on opposite ends, this could be turning into a blue chip bear market, which is probably to be expected in a period of broadening economic weakness and international crisis. Also, if we assume that foreign investors are repatriating money here, the Dow blue chips would be the most likely to suffer.
As we pointed out in last night’s Market Close, the market’s consolidation at the lows argues for one more leg down, perhaps equal in length to Monday’s big decline, which would give the Dow a target of roughly 8200-8600.
However, the ensuing rally may not last. If you go back to that Dow chart, you’ll see labeled three clear moves off the 11,350 top in May. In Elliott Wave terms, that means that any rally will likely be the fourth in a five-wave series, which means that one more leg down should follow that rally. The good news is that the third wave is the meat of an Elliott move, so the fifth wave may only bring modestly lower lows, perhaps to the October 1998 lows of 7500-7800, likely to be a very strong support.
One problem complicating any scenario is that the Bradley cycles remain in strong downtrends until at least October 22, and possibly until November 11; those cycles have obviously been very powerful, so caution is advised until those dates.