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Technical Market Indicators
Dow Theory, W.D. Gann, MetaStock, system tester, indicator builder, custom formulas, momentum, overbought, oversold, buy, sell, signals, top, bottom, Bull, Bear, consolidation, sentiment, contrary opinion
April 17, 2017
The U.S. stock market: confirmed a medium-term downside correction.
Preview from my weekly report*
Both On Balance Volume and RSI price momentum for the Wilshire 5000 Composite Index fell below their lows of first quarter 2017, confirming bearish divergence and a medium-term downside correction.
The Wilshire 5000 index fell to its lowest closing price level in 9 weeks and broke down below its 50-day Simple Moving Average (SMA) for the first time since November. This, combined with bearish price momentum (RSI) and On Balance Volume (OBV), suggests a more severe and prolonged medium-term correction. The 50-day SMA is widely followed by market timers. When most stocks and indexes fall below their 50-day SMAs, as happened last week, confidence tends to be shaken, and more traders and investors tend to sell in order to cut losses, putting further downside pressure on prices. The failure of the 50-day SMA to hold suggests a collapse of investor confidence for the medium term--but not for the long term.
The majority of investors were extremely optimistic in Q1. As a consequence, valuations rose and stocks were excessively expensive. Currently, previously optimistic assumptions about the economic outlook are being widely questioned, and geopolitics appears to be contributing significantly to market risks.
Contrary Thinking: investors have turned bearish, which may prove to be bullish--eventually. Sentiment indicators are not always useful for precise market timing, but rather they are considered to be background factors that set the stage for potential price turning points. The stock market tends to swing from one extreme to the opposite extreme as human emotions swing from greed to fear and back again. The current data shows the $VIX Volatility Index and the Equity Put/Call ratio both jumped up significantly, suggesting a rapid shift to bearish sentiment--but they could rise to higher extremes before the downside correction is over. The latest AAII survey indicates a tilt toward bearish sentiment, which is bullish, with 28.97% Bullish, 33.64% Neutral, and 37.38% Bearish. The CNN Money Fear & Greed Index fell to 25, the lowest level since early November, indicating extreme Fear, which is potentially bullish
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Analysis of market forces may offer a sense of probabilities. But the many variables that can impact market prices are notoriously difficult to predict. And, market analysis is something less than an exact science. So, sound trading tactics are always recommended. See my Money Management Rules.
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