Bulls Need to Hold the July 28 Low

In a previous post I stated that even though the monthly chart had an underlying bullish “hint” to it we were still operating within a down trend (bearish mode) and the technical “sell” signal that was generated at the close of November 2007 is still active. The bullish “hint” is due to the fact that we are now at chart support while the technicals are firming.

Yesterday I showed that the weekly chart had made low and generated a technical “buy” signal at Monthly chart support. However, since the trend is down I am viewing this event as signaling only a bear market rally at this point and not a new bull market.

Looking at the daily chart of price (bottom pane) along with the RSI (top pane) and Composite Index (middle pane) we can see that the last two technical signals help to flesh out this story. There was a buy signal coincident with the weekly buy signal at the July 15 low. However, on July 30 the new highs in both price and RSI were not confirmed by the Composite Indicator and so a sell signal was created. Since that signal the market has sold off for three days. I have been viewing this sell off as a “fake”, that is; I have been thinking that it is just a pause in the action before we continue to the upside. However, I have also been thinking that the short term moving average (bright red line at 1262) would contain the market. It hasn't.

Now note that the RSI remains above 40. Holding the 40 level is crucial in distinguishing a pullback in the uptrend since July 15 from a dive to new lows. More importantly, the Composite Index is now below its July 28 value while price is not. If the market can hold here and turn up the Composite will issue a positive reversal signal and the technicals on the daily chart will again be bullish. Otherwise we are looking not only at a retest of the July 15 low but perhaps even new lows!

Today’s support levels are: 1241-1243 and then the July 28 low in the 1233-35 area. The Wilder stop on any open long position (which would have been taken against the trend) is now at yesterday’s low of just at 1247.45. Let's see if the bulls can hold the July 28 low!