Stock Market Analysis

Thursday, March 11, 2010

Impending Pullback...

The Dow closed yet another sideways day, moving up by 44 points despite early profit taking.

Why do I say that the Dow made another sideways day when a 44 points move is a pretty significant one? Well, thats because it still closed within the trading range set by the past few sideways days, so there are no breakouts. However, the S&P500 and the Nasdaq composite seems to be painting a different picture altogether. They seem to have both broken out to upside and moving higher each day, so shouldn't the Dow follow suit shortly?

Before you get too enthusiastic, let me tell you why I think the S&P500 and the Nasdaq composite are in for big trouble soon.

First of all, even though they are both making new highs, their trading volume continues to contract over this period of gain. This is more revealing when you look at the trading volume of the SPY and the QQQQ, which are ETFs of both indexes. This, together with the huge gap between the indexes and their daily 30MA and the grossly short term overbought condition says, the longer this goes on, the harder the fall will be. Yes, the last time we saw such a huge break from the 30MA along with such gross short term overbought condition was just before the 2008 crash.

No, I don't think the bear market's coming back as the fundamentals are now different. But there will definitely be a significant pullback in order to digest all that overbought condition before the market can move on higher. This pullback would be significantly milder for the Dow as it isn't as grossly overbought as the other two indexes. The Dow would probably pullback to the 10,400 area when it happens and establish a new support. So, this is definitely not the time to be newly short term bullish.

For now, the Dow remains in all out bull trend.

Chart of Dow Made Using Telechart. Want Your Own Charting Software? Download FREE Now!


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