After experiencing a brief correction early last week the Dow Jones Industrials promptly reversed its falling trend and continued its bullish trend by week's end. This is precisely as we predicted in last week's commentary, though the shallowness of this latest correction surprised even us. We knew, however, that the Dow's upward trend would remain unchallenged and that the long-awaited bear market is at least several months away.
Key reversals—which occur when prices make a new intraday high only to close considerably below the previous day's close on high volume and forecast immediate corrections—do not forecast amplitude; thus, an analyst has no way of knowing how deep or long the correction will be. Apparently, quite a few analysts last week interpreted the bearish chart patterns (which were of only minor degree) as forecasting a major decline and immediately began screaming "bear!" We avoided this mistake simply by looking at the momentum indicators which show no signs of a reversal on the immediate horizon. Volume has thus far confirmed the bullish trend and volume is our main guide in interpreting price behavior.
The Dow's chart shows that its long-term uptrend line (of both major and intermediate degrees) have not come close to being challenged yet. As long as this is the case we are nowhere near a major correction. More likely, the Dow will make a few more stabs at puncturing the psychologically-imortant 10,000 barrier on a closing basis before the upward trend continues in force. There may be a few more setbacks along the way but this level should be overcome with relatively little difficulty in the near future. For now, it will be important to keep in mind the following Dow Jones support levels: 9600 and 9400, with important intermediate support at 9100. Until 9100 is broken, there are no worries. In the Dow Jones Futures, immediate overhead resistance lies at 9970 with support at 9700.
Based on the Rule of Alternation, a Dow of 10,500 can be expected at minimum once the 10,000 crucial resistance is finally overcome. And with momentum, liquidity and investor participation factors all in the Dow's favor, this should be forthcoming very soon.
One of the more important indicators we will be looking at in the coming weeks is the Cumulative Volume Index (CVI). This indicator, which is a combination of the NYSE Advancing/Declining Volume indices, is the number one indicator for detecting distribution when overlaid with the Dow's chart. Looking for signs of insider distribution will be our key for knowing the when the bull market is finally up and the bear is near. Until then, we will remain mostly invested. The CVI did show us signs of a minor distribution campaign underway last month (as indicated by the circled chart divergence with the Dow) but the CVI has since continued to trade in tandem with the Dow to the upside. We'll need to see a major divergence between these two indices before we can assert with confidence the long-awaited bear is near.
Meanwhile, our Filtered Tape Indicator©, which turned temporarily overbought early last week in anticipation of the one-day Dow correction, has just flashed a minor buy signal which at least indicates the uptrend will continue into next week. We will watch this indicator closely for further buy/sell signals.
Investment advisory sentiment—an important leading indicator—is still favorable for a bullish near-term outlook. It seems the bears are still out in force, and while much bullish sentiment exists, it is being tempered with widespread bearish opinions among advisors. The latest reading from the AAII Advisory Sentiment Ratio Index show a fairly equal balance between the bulls and the bears, and the index has not yet flashed a bearish signal.
Many investors are concerned what affect the recent U.S. airstrikes against Serbia will have on the markets. Many assume it will drag down the U.S. stock market is the U.S. becomes entwined in a drawn-out military operation overseas, especially against so formidable an opponent. What many do not realize, however, is that the stock market discounts all foreseeable future events—including wars—and trades on the basis of future expectations of supply and demand, not the current supply/demand balance. Panics based on airstrikes can and have occurred in the past (such as the "Pearl Harbor Panic" in the 1940s) but recoveries are usually quick and the uptrend tends to remain unbroken. So regardless of whether the U.S. becomes involved in a war the Dow has probably factored all the important variables and has discounted the worst. And wars often prove to be bullish factors for our stock market since industry is called upon to produce needed supplies above and beyond normal supply and demand.
For now we remain mostly invested in the stock market with an eye toward lightening our positions if one or more of the above-cited supports are violated.
29 March 1999
Clif Droke is editor of the weekly Leading Indicators newsletter, covering the U.S. equities market outlook from a technical perspective as well as the general economic outlook. He is the author of the recently published book, Technical Analysis Simplified. For a free sample issue of Leading Indicators, send name and mailing address to email@example.com or mail to: Leading Indicators, 816 Easely St., #411, Silver Spring, MD 20910.
Also by Clif Droke
Back to Gold Digest
Copyright © 1997 - 1999 vronsky and westerman