Saturday, June 20, 2009

Market outlook: Entering the most critical period

The market ended with mixed results for this past week. I have summarized several charts which help give a clearer picture of where we are headed. I will discuss each chart and cite some comments from a prominent business leader to help support my conclusions. In summary, we have reached the top of this recent rally.

The first chart below is a 5 Year chart of the Dow.

The top part of the chart is the actual closing value of the Dow, while the bottom area shows the Volume. It is clear from the Blue lines that we hit resistance and have not been able to go above it. It is also clear, if this is true resistance we are headed lower. We have not tested the lows. If we ever get above resistance the second blue horizontal line crosses at 10,000. You will also notice that the Volume climbed as it approached the major market drop to the 6,400 low. and while the volume of the rally from the low had good volume it declined until it is most recently well below what was needed to sustain this rally. I therefore conclude we will go lower now, rather than continuing to 9,300, the high of the range from the market bottom.

This next chart below is of the S&P 500. It shows a very similar pattern. There is no Volume data available for the S&P 500.

I draw the same conclusion here as I did with the Dow. We are headed lower.

Now let me string together a series of comments from the Vice Chairman of General Electric, John Rice, in an interview yesterday. He said, "I have not seen it (Green Shoots), in our order patterns yet. At the macro level, there may be statistics suggesting the economy is starting to turn. I am not seeing it yet. We see a world where good companies and good consumers can’t get all the credit we would like. Companies with lots of cash on their balance sheet are worried about whether they will get what they need for working capital and are cutting spending. Until that changes I don’t think you will see a significant rebound, We are preparing for 12 or 18 months of tough sledding.”

I recommend you read the entire article to put all of his words into context by clicking here. But it infers that many companies are struggling to make a profit and are cutting costs as their chief tool.

This does not bode well for the market as, in a few weeks, we go into earnings season for the 2nd Quarter. If you are short the market you should do well. Or if are considering jumping into the market, I would suggest against it. Keep your powder dry and preserve capital. The next month will have many shaking their heads about this market.

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