The arrival of the Bear Kingdom?

The breaking-out oil, rising inflation, the bambling from the toothless Fed, and the disappointing ER from several key tech leaders delivered a devastating blow to the bulls as the market suffered huge losses last week. By the end of last Friday, DOW became the first major indices to smash through the Fed-engineered double bottom of Jan/Mar’08 with SP500 only a spiting distance away its bottom. By doing so, DOW is now about 20% off of its last year’s high, thus formally kicked the door to the Bear Kingdom wide open.

On Weekly Charts:
DOW continued to lead the market to the downside as it closed below MA200 along with SP500 for the first time in over 6 years. For both DOW/SP500, the momentum has now firmly flipped to the negative side, while declining for the 5th straight week for NASDAQ/Russell2000; MACD in solid down trend formation for both DOW/SP500; volumes rose for all major indices as the losing streak now at four straight weeks; overall candle formation became increasingly bearish; DOW is entering oversold territory, for other major indices, only RSI2 is now in oversold territory while stochastic still has distance to go.

On Daily Charts:
The negative momentum kept rising for all major indices as they accelerated to the downside; DOW is now 300 points south of its Jan’08 intra-day low, while SP500 only 22 points north of its Mar’08 intra-day low, but NASDAQ still about 160 points above its Mar’08 low; all major indices have been lingering in deeply oversold territory with several failed attempts of technical rebounds.

On 60 min Charts:
Just want to point out that there are signs of a nascent oversold rebound for all major indices.

Thoughts and observations about the current market conditions and near-term outlook:

1. Technically speaking, if the market was at a crossroad last week, it is now taking the path to the bear country. The weekly charts suggest that it is likely to take another 2-3 week decline before all major indices would reach the oversold levels that were associated with the previous bottoms in Aug’07, Jan’08, and March’08. Given that, other major indices are now very likely to follow DOW’s footsteps and break their previous lows in next 2-3 weeks.

2. Even though VIX is up for the week and now on the verge of resuming its uptrend on the weekly chart, it continues to diverge from the market movement and currently at a level that is around 1/3 lower than those associated with the previous bottoms. While arguments that the muted VIX is largely due to the lack of any significant single-event have some merits, it is rather obvious that relatively speaking, there are still too much complacement in the market. Once again, you won’t see a real bottom or at least a tradable bottom until the fear turns into panic and the Wall Street is soaked in blood.

3. It is worth to point out that all major indices and many key sector indices have now completed the 1-2-3 trend reversal, and their primary down trend, which started last November, has now resumed following the 3 month low-volume counter-trend rally. I would also like to point out that if the previous decline was largely due to the self-doubting and discouraging bulls, bears really took their glove off this week as the Lowrys selling pressure reached multi-year high last week.

4. Here is another alarming bearish signal: according to the latest COT report, the commercials have dramatically reduced their long positions this week. In the past, such re-positioning by the big boys were often followed by a 2-3 weeks of major market decline.

5. Perhaps the most important and fundamental changes in recent days are the raging inflation AROUND THE WORLD with many central banks have embarked a rate-hike campaign (with ECB likely to join the list next Thursday) hoping to reign in the inflation before it is out of control. I would like to point out two things: first, this rate-hike campaign has just started with a LONG WAY TO GO; second, the rate-hike will significantly dampen the economic growth around the world if not triggering an outright global recession. On this regard, the US is far behind, and we may pay a much bigger price down the road.

6. Contrary to my expectation, oil broke out a 3-week trading range to the upside this week despite of some bearish divergences on its daily chart. Other commodity sectors, especially energy related ones such as coals, are poised to resume their parabolic ascending. Even though the US dollar may weaken further and thus drive oil/commodities higher in near-term, the increasing possibility of a global recession could ultimately pull the carpet underneath them. When that occurs, we would likely see an equally parabolic descending, if not more dramatic.

7. The market is on a 4-week losing streak, but since Sept./2002, no losing streak has been longer than 4 weeks. That, along with other factors, might favor yet another technical rebound attempt next week. However, I doubt the size and sustainability of any rally under the current market conditions. Right now, I am leaning to an overall “sell all rally” strategy until the major indices reach a tradable bottom, my guess is: DOW 10750-11000, SP500 1170-1220, NASDAQ 2150-2200.

I welcome any comments!