Major US stock indices have lost about 12% to 25% this year, a painful slump after two years of gains. Time to buy? Not so fast, based on a technical analysis of current market conditions.
Andrew Addison, an experienced market engineer, owner of the Institutional View research service, and contributor to: Barron’ssees more disadvantage for the
Dow Jones industrial average,
given the lack of inventories to withstand this year’s selling pressure.
Unlike fundamental analysts, who try to determine the value of assets by studying financial or economic factors, engineers examine chart patterns, trading volume and other metrics to identify likely turning points. “When markets are about to take a meaningful turn, you find that the action in the index camouflages strength or weakness beneath the surface,” he says.
At the moment there is no camouflage: things have been ugly, above and below.
There’s no evidence that more stocks are reversing their downward trend as broad indices fall, he says. There has also been no “meaningful contraction” in the number of stocks hitting new lows, or a noticeable increase in the percentage of stocks trading above their 50- or 200-day moving averages. “Until the internal market improves, any rallies will likely be short-lived, like a tropical rainstorm,” he says.
Technical analysts also study support and resistance levels, points where the demand for or supply of investments has historically halted sell-offs or gains. Addison sees support for the Dow at around 29,000 to 30,000; the average average on Friday was around 31,950.
Now that the S&P 500 has fallen below 4050, the downside risk is 3800 and possibly 3600, based on his reading of the index chart. A drop to 3800 would represent a 4.8% loss based on Friday’s price of 3990.
Addison spent a lot of time studying the
a market-cap-weighted index of the 100 largest non-financial companies listed on the Nasdaq, and an indication of the growth stocks that have propelled the bull market to dizzying heights. With a recent 11,945, it’s close to support, he says. “We could see the Nasdaq 100 starting to stabilize around 11,000,” he adds, noting that the index spent about six months, from June to December, in a trading range of about 10,500 to 11,000.
The Nasdaq 100’s 200-week moving average, which determines the long-term trading trend, is just below 10,700. The last time the index approached that support level was in March 2020, Addison says, when it fell to 6,770, near its 200-week moving average of 6,600. lows of 2009 after the financial crisis. “The major indices have not violated them in the past 13 years,” he says.
If the Nasdaq 100 were to break decisively below the 200-week moving average, it could have “earth-shattering consequences” for stocks, Addison says.
Haven’t we had enough of that already?
Corrections & Reinforcements
A fall in the Nasdaq 100 below the 200-week moving average could have “earth-shattering consequences” for stocks, according to Andrew Addison. An earlier version of this article incorrectly referred to a decline below the index’s 200-day moving average.
write to Lauren R. Rublin at [email protected]