- NEW YORK (Reuters) - U.S.
stocks have just ended the quarter with their biggest losses since the
1987 stock market crash but the worst is yet to come, say technical analysts
who chart stock movements, trading volume and market sentiment.
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- Even though stocks continue to plumb multi-year lows,
the market hasn't seen the kind of "wholesale" dumping of stocks
they say it needed to wash out the remaining excesses from the late 1990s
bubble.
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- "Investors should stay on the sideline," said
Mark Arbeter, Standard & Poor's chief technical analyst. "I wouldn't
recommend people buy any stocks at this time."
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- The broad S&P 500 index .SPX , which has tumbled
more than 17 percent in the third quarter that closed on Monday, could
fall a further 20 percent or more to 600-680 level in the next couple of
months, said Arbeter.
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- The Nasdaq, which on Thursday fell to its lowest close
since September 1996, could drop an additional 15 percent to the 1,000
level before it gets better, said Arbeter.
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- VOLATILITY INDICATING BOTTOM?
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- Some analysts, however, noting the unusually long period
of high market volatility, say the market may already be in the middle
of a bottoming out phase. Investors, they say, may not have to capitulate
before the market turns around.
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- Technical analysis in its attempts to predict market
direction, includes reading price strength, trading volumes, market breath
and sentiment indicators, while ignoring macroeconomic issues like outlooks
for the economy and corporate earnings, as well as non-economic factors
such as the effect of a potential U.S. war on Iraq.
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- As uncertainty over economy's growth has increased, technical
analysis has come into greater demand. Technicians have come into vogue
as analysts practicing fundamental analysis have come under fire for conflicts
of interest and dubious stock recommendations.
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- SENTIMENT WATCH FAILS?
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- At least one of the chartists' favorite gauges, the Chicago
Board Options Exchange's Market Volatility Index .VIX , appears to be deceiving,
analysts say.
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- When Wall Street's so-called "fear gauge,"
the VIX, breaks to the upside though the panic level of 40, it usually
signals a bear market bottom. But that hasn't happened this time, said
John Kosar, technical analyst at Bianco Research.
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- The VIX, which measures the implied volatility of the
U.S. equity market, has been above 40 for half of the time during the past
10 weeks, said Kosar.
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- A low VIX, normally in the range of 20-25, indicates
that traders are uninterested and is a precursor to a selloff.
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- "I believe this is unprecedented," said Kosar,
adding that the VIX spiked over 40 only about 12 times since 1996. "Some
people say the VIX doesn't work any more (as a market-bottom indicator).
I think that what it shows this time is that we've got an unusual amount
of sustained volatility. It could mean that we are having a really important
bottom building here."
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- Investors, however, should be more careful in using sentiment
indicators because they tend to work well during the bull market, but have
failed in the bear market, said Arbeter. Sentiment indicators have been
wrong in signaling the market's bottom in September 2001 and last July,
he said.
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- PRICE ACTIONS AND SUPPORT LEVELS IN FOCUS
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- Chartists now say price actions and volume are their
top indicators, while sentiment readings like the VIX, put-call and up-down
volume ratios have become secondary.
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- Richard Dickson, a technical analyst at Hilliard Lyons
in Louisville, Ky., expects the major stock indexes to make lower lows
in October.
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- The S&P 500 .SPX will likely break its July low of
797 and drop to 760 or lower this month, the Nasdaq composite index .IXIC
to 1,040 and the Dow Jones industrial average .DJI to 7,200 level, said
Dickson.
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- October has been a "mediocre" month for stock
returns, with stocks on average gaining 0.4 percent since 1950, and a month
in which the market made "important lows" in previous bear markets,
said Dickson.
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- On Friday, the S&P 500 was trading at 806, the Nasdaq
composite index at 1450, and the Dow Jones industrial average at 7601.
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- Key support level where buyers are expected to swoop
in is at the July low of 775-797 for the S&P 500, and resistance, the
point where sellers are likely to emerge, is at 860-870, Dickson said.
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- Once a stock or an index breaks a major support level,
the stock or index is more likely to move very quickly to the next area
of support, said S&P's Arbeter.
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- If the S&P 500 does break its July low, it could
quickly drop to the next support level of 775-780 in three to five days,
and fall further to the 600-680 level in the next couple of months, said
Arbeter. Until the S&P 500 close above 965, "all rallies can be
considered bear market in nature," he said.
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- Arbeter also wants to see one or two weeks of large volume
trading once the S&P 500 breaks its July low. High volumes could also
signal market bottom, he said.
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