Stock Market Viewpoint

Stock Market Viewpoint
Reading the Tea Leaves...

Thursday, August 18, 2011

Death Cross Situation 8/18/11

Stock Market Technical Analysis

                                                  click on above image to enlarge
A little bit tonight about the potential death cross situation across the three big indexes.  The red line is the 50 EMA and the black line is the 200 EMA.  A death cross is when the 50 line crosses down through the 200 line.  The top chart is the DOW, center NASDAQ, bottom S&P 500.  Before I discuss what is happening now is worth taking a look at what happened in late August last summer.  Last August, the S&P executed a death cross convincingly in the latter half of August shown by the red line going underneath the black for several days.  At that same time, the NASDAQ just barely had its 50 slip below its 200 for a miniscule death cross while at the same time, the DOW executed a 50/200 line bounce in the last half of August.  The market unfolded with the S&P going down first and quickly but just when the NASDAQ was starting a death cross,  the DOW suddenly had a 50/200 line bounce instead of a down  cross which kept the NASDAQ from being a convincing death cross and actually was twisted back up to appear to be a bounce instead which caused enough short squeezing to totally reverse the completed death cross on the S&P within a matter of days.

The same exact scenario could be unfolding here this week.  The S&P has already suffered the death cross over the past two trading days but right now the NASDAQ is at the point where it could begin the death cross over the next couple of days.  If the DOW is supported over the next few days, it will allow it to do a 50/200 bounce instead of a death cross which if timed correctly will stop the NASDAQ death cross as it is beginning and reverse the death cross the S&P has already suffered.  This could be an exact repeat of last year.

The key is the DOW, it has to trade sideways over the next several days.  If it does history could easily repeat itself here.  The key points to watch are last week's lows on all three indexes.  If any of the three break through last week's  low the market sentiment could sour enough to bring in sellers on the DOW also and if it lasted for a couple of days a totally opposite scenario could happen in that we could have a triple death cross which last happened on January 18 2008 which made for a poor first half of the year leading up to the credit default swap fiasco coming into light in the summer. 

All of Wall Street's super computers will be closely tuned to this situation.  Maybe a few of the DOW stocks will get upgraded during the next couple of days to draw in tier two institutional fund buying along with a void of bad news out of Europe, the bulls might have something to hang their hat on.  This is a serious situation because the economic news was very dissappointing this morning with a really bad drop down in the Philly Fed Number.  The bad economic backdrop seems to put the odds in favor of a failure on the DOW death cross but if Wall Street decides to jam the market at just the right point during the next couple of days it could trigger a wicked short squeeze which is exactly what happened last summer on 9/1/10 where the short covering lasted for weeks and the market traded upwards even though the S&P had a confirmed death cross.  We will see, it will be a very interesting week...