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Bears Enjoy Their Best 2 Weeks of 2012: What's Next for Stocks?
Our indicators are showing us how the rest of the year may unfold
By Bob Stokes
Mon, 16 Apr 2012 17:45:00 ET
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Stock market bears were all smiles as the week ending Friday the 13th was anything but unlucky.
 
The S&P 500 ended its worst weekly performance since December, shedding two percent. Moreover, the decline accelerated at the end of Friday's trading session.
 
That's two weeks in a row that stocks have ended in the red (four weeks in a row for European equities).
 
The market's downturn started April 3. Our Short Term Update had been expecting stocks to top, and on March 30, posted the following Dow Industrials chart and commentary:
 
 
 
 
A 10-day average of NYSE new highs relative to new lows made a rally high on February 8 and has been in a clear mode of deterioration since then. The middle line on the chart shows a Dispersion Index, which is simply the difference between two moving averages. When the averages are expanding, the Dispersion index is rising, which indicates that the advance is strengthening. When the moving averages contract, the Dispersion index declines, which indicates that the market's rise is weakening. The line currently shows that the advance from March 6 has been weaker than the rise from November 25-February 29...The charts lowest line shows traders' optimism. After pushing to a high of 79% on March 19, the highest level since the July 7, 2011 high (81%), traders' excitement toward stocks is dissipating.
 
When these measures are viewed in the context of the diverging sectors and foreign stock indexes...they paint a picture of a stock rally that is at or very near an end. The red up arrows on the chart show five separate touch points on the support line that started at the October low. As we have noted with respect to market trendlines, we don't create them, the market does. All we do is draw the line on the chart to highlight what the market thinks is important. Clearly, this line is important. When the index closes materially beneath this support, it will indicate that stocks are ready to move lower...the odds are that this break will occur sometime next week.
Short Term Update, March 30
 
Less than a week later, that's exactly what happened. Our April 4 Short Term Update noted:
 
...for the first time in 6 months, the DJIA ended beneath its up-sloping support line that started at the October 4 low...
 
Many believe that the indexes will bounce back strongly.
 
It's clear to us: mainstream market observers are not seeing what we are.
 
We look at several technical indicators, yet the foundation of our analysis is the market's Elliott wave price structure. It's now telegraphing an eye-brow raising market message. 

Tags: Bear market, Elliott wave, market forecasts, technical analysis, technical indicators, Traders
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