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Yes, Technical Analysis Works Right Now

The indicators and divergences are still here, even in extremes.

The Market

I was asked a question this morning that I wonder if many of you have on your minds: Does technical analysis work in this market?

I do wish I had a dollar for every time I have been asked that when markets get extreme. Because the answer is, it does.

As long-time readers know, I don’t much care about index levels. Big deal if we break to a new low and through some well-watched support. The question is if we have positive divergences when we do so. The question is if sentiment is bearish when we do so. The question is if momentum is waning on that break when we do so.

I was asked that question in the post 1987 crash period. While in hindsight that looks like “Oh it was so easy to buy,” the reality is it wasn’t so easy to buy. The moves were wild, some days the selling was relentless. And we didn’t have circuit breakers back then. But the technical indicators did work. The market rallied then it sold off. It tested, it retested. That’s technical analysis.

In 2008, I was asked the same, because you know, the entire financial system was in tatters. And yet, notice that the peak reading of new lows came in October and we rallied, tested, retested, rallied, tested, retested, and so on for the next five months. Sure, we went much lower on the S&P 500, but again, those are just lines on a chart. What matters is the process of finding a bottom.

When I say finding a bottom, I don’t mean finding a low. I mean a bottom. And a bottom takes time to form. It requires so many ups and downs, enough to make you sorry you paid for the roller coaster ride. But eventually whatever issues the market has work their way through the system. Whatever is bothersome will eventually balance out. And that is what technical analysis and the indicators are meant to show us.

Ever since the market collapsed a month ago I have noted the chart of 2010. Not because I think it’s a perfect analog where you can draw in today’s market and see every wiggle up and down, but because that was a market where we fell from a high and did so in incredibly quick order. It took five to six weeks before we got any sort of rally that lasted longer than a day or two. That’s how long a shock to the market took to wear itself out. We are now in week five or fix, depending on where you count from.

But even after that rally in 2010 we backed off, rallied, backed off to a lower low, rallied, and on and on.

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So where are we today? I think we are close to a rally. Many stocks are already rallying — see the semis. Do I think the rally will last? No I do not. Because there is a bottoming process that must take place. And after the decline we had I still think we’re talking months not weeks.

Monday’s market saw fewer new lows again. It has now been eight trading days since the number of stocks making new lows has expanded. The S&P is down 300 points since then. The 10-day moving average of stocks making new lows rolled over on Friday and continues lower Monday.

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The breadth wasn’t stellar, but the McClellan Summation Index still only requires a net differential of positive 3,100 advancers minus decliners to halt the decline. Nasdaq’s net volume was positive. I take that as a plus.

The Russell 2000 did not make a lower low intraday on Monday. The Transports did not make a lower low, either. Both of these were some of the weakest groups as we launched to the highs. Remember the selling has to start to dry up somewhere.

The credit-related exchange-traded funds JNK (JNK) - Get Free Report and HYG (HYG) - Get Free Report are still problematic. But the DSI for Nasdaq and the S&P are still under 10. I am on the look out for a rally this week. Perhaps I’ll be wrong in looking for it, but there are a few improvements. And a rally would start the bottoming process.

New Ideas

I am not much of a fan of oil down here, but the DSI did get to 5 a few days ago and is now at 17. But I want you to look at the reversal today. Obviously a break back under is problematic. But did the selling finally dry up? It’s worth paying attention to.

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We had a good trade in Shopify (SHOP) - Get Free Report in the fourth quarter last year, so I want to take a look at the chart now since I saw they have provided small businesses a free, easy way to set up a website for them to do curbside pick-ups. If the stock gets to $425, it’s probably a good place to sell it, but more than that, notice that the low was five days ago. There should be testing and retesting to come, but that’s what I’m talking about: The selling has to dry up somewhere.

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Today’s Indicator

The 30-day moving average of the advance/decline line is getting closer to an oversold condition. It could be oversold as early as this coming Thursday, but if not, next Thursday.

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Q&A/Reader’s Feedback

Helene welcomes your questions about Top Stocks and her charting strategy and techniques. Please send an email directly to Helene with your questions. However, please remember that TheStreet.com Top Stocks is not intended to provide personalized investment advice. Email Helene here.

As we have discussed, there have been stocks that have held for a week or more only to give way again on the downside. Raytheon (RTN) - Get Free Report is one of those. So as long as it stays over that low from a week ago, it’s worth a try. But if it cannot get up and over Friday’s high, there is a warning in that, too.

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One reason I don’t want to attempt to bottom fish in General Electric (GE) - Get Free Report is that break at $10 measures to around $5. So if it breaks last week’s low that the next stop for this stock.

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The best news I can offer on Huntsman (HUN) - Get Free Report is that there is a measured target around $13. But there is another around $10. I would wait on this one, because it has held several times during this decline only to give way again.

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If only I knew then what I know now, I would have had a much lower target measured for Jabil (JBL) - Get Free Report when I recommended it as a short in January and February. My target was $30-$32. Now it has almost halved from there. My confidence level is not high that this is the ultimate low for JBL, because that top it broke down from measures to $10-ish. Can it get a rally from here? Yes. But if it cracks back under $18, I’d run for the hills.

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