The major U.S. stock market indexes have lost roughly 12% to 25% this year, a painful setback after two years of gains. Time to buy? Not so fast, based on a technical analysis of current market conditions.
Andrew Addison, a veteran market technician, proprietor of the Institutional View research service, and a sometime contributor to Barron’s, sees more downside ahead for the
Dow Jones Industrial Average,
given the dearth of stocks resisting this year’s selling pressure.
Unlike fundamental analysts, who try to determine asset value by studying financial or economic factors, technicians examine chart patterns, and trading volume and other statistics to identify likely turning points. “When markets are about to make a meaningful turn, you find that the action in the index is camouflaging strength or weakness beneath the surface,” he says.
At the moment, there is no camouflage: Things have been ugly, above and below.
There is no evidence that more stocks are reversing their downtrends as the broad indexes fall, he says. Nor has there been a “meaningful contraction” in the number of stocks hitting new lows, or a notable increase in the percentage of stocks trading above their 50-day or 200-day moving averages. “Until the market’s internals improve, any rallies are likely to be short-lived, like a tropical rainstorm,” he says.
Technical analysts also study support and resistance levels, points at which investment demand or supply has stopped selloffs or rallies in the past. Addison sees support for the Dow around 29,000 to…