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Back from
the Brink
Thursday should have marked the short term low for the market. If it
didn't, then watch out below. War looms on the horizon and all the news
is still bad. Fundamentally, the market is still ridiculously overpriced
but there are some technical indicators showing signs of a possible
rally. Let’s go to the charts. Below is the Value Line Geometric
Index. The bottom bar graph shows the closing price over the last 7
months. The top indicator is Wells Wilder’s, Relative Strength
Index (RSI). The RSI is a momentum oscillator. It gives us a picture of
the internal strength or weakness of the market. Notice that while the
price of the VLG Index has matched and slightly exceeded it’s
7/24/02 low, which was correctly recognized in our 7/27/02 Special
Report, the RSI has not made a matching low. Rather, it is substantially
above its 7/ 24/02 low. This is called “divergence”, or in
this case, positive divergence. Wilder’s book, page 63, states:
" DIVERGENCE between the RSI and price action on the chart is a
very strong indicator that a market turning point is imminent." The
middle indicator is the MACD or Moving Average Convergence/Divergence.
This indicator is a trend-following momentum indicator but calculated
with a different method than the RSI. Notice the positive divergence
here as the price made a new low but the power of the downward trend is
greatly diminished. These two momentum indicators are saying that the
selling pressure is drying up! The next chart is still the Value Line
Geometric but the upper indicator is now 27-day Stochastic Oscillator.
This indicator has several ways to be interpreted. One is when the
oscillator falls below the 20 line it is considered over sold. Or liken
to the rubber band has been stretched too far to the down side. While
the indicator has turned up, it will not give a proper “Buy”
signal until the oscillator climbs above the 20 line or crosses the
dotted moving average. A second interpretation is to also look for
divergences between the price and the oscillator. From the graph it may
be hard to tell but on the 7/23/02 low the oscillator registered a 1.96
reading and yesterday in came in at 3.03. A slight divergence, but a
divergence all the same. Now, for some confirmation let’s look
outside the Value Line. The divergences continue on the next chart of
the daily NYSE NEW LOW posting. The number of new lows on the NYSE are
dramatically lower in this market decline verses that of the 7/24/02
decline. This is the type of action I like to see. Also, the oscillator
is at the opposite extreme of the range. This indicates the New Lows are
stretched too far to the upside and should snap back down, although a
break will not be official until the oscillator moves below the 80 line.
On the next page is the Dow Jones Composite, which is a combination of
the Dow Industrials, Transports and Utilities. We can see a clear
divergence from the Value Line Geometric. The Composite has not breached
the 7/24/02 lows. The oscillator, at its oversold level, is also showing
a positive divergence verses the 7/24/02 low.
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