first majestic silver

How Oversold Can They Get?

September 10, 2001

As of Friday's close, stochastic readings for many of the issues tracked in my daily newsletter were tracing out oversold lows that fell practically off the charts. Shouldn't technicians be screaming "Buy 'em!" from the rooftops, just like some of their most trusted indicators? Perhaps. Considering the evidence, that advice seems a decent bet to produce a big payoff next week, perhaps as early as Monday afternoon or Tuesday. But as steeply as this market has been falling, there is more than just a little risk in being a mere day or two premature on the buy side. Just since Tuesday, for instance, the Dow has fallen more than 700 points. While this may have primed CNBC's pep squad for some serious bottom-fishing, it leaves me more respectful than ever of the bear, which in recent weeks has bamboozled some of the best technicians around with a few widely publicized, preternaturally bullish technical readings.

Perhaps Richard Russell is right in suggesting that chartists discard their bull-market tools in order to comprehend this bear, which, given its manic antecedents, threatens to be the most deceptive and vicious of them all.Indeed, in strongly trending markets such as we have been witnessing of late, stochastic indicators in particular can be notoriously deceptive, flashing "false" reds just far enough ahead of the turns to put a trader on the ropes -- or, to use a more accurate metaphor, beneath a falling anvil. For my part, I'd like to be able to take credit for calling the turn when it finally comes. I actually do believe it will occur this week, since, to begin with, oversold readings for the S&P futures are hitting lower lows than any I have ever seen or recorded. But that does not mean they cannot eke out just a little more downside as the S&Ps fall a final 40 to 50 points or more in the space of just a few hours. As always, I'll stick with my pivots and targets. Both say the market's descent has farther to go.

Deflation Incubating

Presently, I am as bearish on the big picture as I conceivably could be, for it resembles in nearly all of its details the nascently deflationary landscape that I first sketched in Barron's and The San Francisco Examiner nearly ten years ago. The only things needed to complete the picture are a falling (rather than merely softening) dollar, and a pronounced downturn in the housing market. Does this mean that stocks can only go down from here? Of course not. Even if the Dow is presently on its way to 700, along the path there undoubtedly will be bear rallies of such magnitude as to temporarily overwhelm with doubt even the most case-hardened bears. It has been five months since such a rally occurred, and stocks as of today have since given it all back, and then some.

As noted earlier, however, certain indicators have registered oversold extremes that have been seen but rarely over the last several decades. We therefore should not be surprised that more than a handful of gurus -- including a few who share my worst fears about the economy -- have been eager to call a bullish turn in the stock market. I would like to believe they are right, since any such rally would help to forestall the ravages of deflation that we all should fear more than a mere bear market. But much as I want to believe the bulls are right, and numerous as they have become in recent weeks, I am compelled to stick with my own indicators, and to trust my own judgment amidst the cacophony. Unfortunately, by my runes the picture grew even uglier last week. For it is the inflection points that I refer to as a "hidden" pivots that I trust above all, and the drubbing a few of those pivots took on Thursday and Friday suggests that the worst is not over, not yet.I'm willing to turn on a dime if the resilience of lesser pivots in the days and weeks ahead suggests a rally in the offing. But the mere fact of an important "hidden" support being penetrated, as many were last week, is strong evidence that the downtrend has not spent all of its energy. We can only hope that I'm wrong, and that my TRIN-fearing colleagues are right.

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