Desperately Seeking Traction

Market
internals and price momentum have done little to convince me that
we’ve seen a final bottom in the stock market, as I said in my previous
column. “However, some measures of sentiment, such as the VIX and Put/Call ratios,
do indicate short-term oversold conditions.  Price
divergences between the indexes and the MACD have also emerged.
Since momentum divergences often precede reversals, we should view them
as “preconditions” to the bottoming process —- but not as
confirmations of a bottom. 

On
Tuesday I showed you charts of these divergences in the QQQ and BBH.
I’ll show them to you again simply to underscore the following point:
If the market blows through these minor oversold conditions and
momentum divergences — if the market is unable to find upside traction
SOON — then taking out the September 2001 lows in the broad averages is
a virtual certainty in my mind. The
Nasdaq 100 has already violated its September 2001 lows. 

The problem with
this scenario for the market is that there are no clearly defined support
levels beneath the September lows. The
implication is that big-cap stocks that have multi-month topping patterns,
such as IBM
(
IBM |
Quote |
Chart |
News |
PowerRating), Home
Depot
(
HD |
Quote |
Chart |
News |
PowerRating), American International
Group
(
AIG |
Quote |
Chart |
News |
PowerRating), General Electric

(
GE |
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PowerRating), Pfizer, Inc.
(
PFE |
Quote |
Chart |
News |
PowerRating) et al,
could see enormous declines — perhaps back to 1995/96 levels based on
classical pattern targets.  Please
see
my May 17 column for a discussion of these chart patterns.  

My best advice for
now: Sit tight, play defense and watch how the market responds to these
divergences.  If you must trade,
then ETFs are my preferred vehicle of choice due to their relative safety vs.
individual stocks.