Latest Numbers Call for Increased Caution

Stock markets are trading down to begin the week, with the DOW giving up 57 points on Monday and down over 150 points at noon on Tuesday. The biggest decline in home prices in two decades drove the selling and renewed concerns about the subprime mortgage and credit markets.

 The near-term technical picture is reflecting some caution at this juncture. The new-high/new-low (NHNL) ratio, a measure of the number of stocks touching a new 52-week high versus the number of stocks, continues to be weak. The NHNL ratio on the NYSE is weak, with 19 of the last 24 sessions below the bearish 20% reading. The NHNL needs to strengthen in order to drive stocks higher to sustainable levels. Likewise, the NHNL on the NASDAQ has been bearish in 10 of the last 22 sessions. The index has not recorded a 70% plus reading since July 16. The trends on both indices remain down at this time.

Examining the market breadth on the NASDAQ as indicated by the advance-decline line (A/D), it has been relatively weak. Six of the last 10 sessions were below 1.0. We would need to see a trend develop before we could see any sustainable upside moves.

 Another area that needs to see strength is the Relative Strength Index. The current readings are neutral and need to rise to the upper 70%-80% portion of the channel to support any rally.

 For the NASDAQ, support is found at the 200-day moving average (MA) of 2,504, with the upper target at the 50-day MA at 2,601 and the 52-week high at 2,724.

 On the blue-chip side, look for resistance at the 50-day MA at 13,478 and 13,695. Downside support at the 20-day MA at 13,236 was breached in Tuesday intraday trading. This could signal more downside moves for the DOW back to 13,000.

 The broadly based S&P 500 has broken below its 200-day MA at 1,456. Watch for support at 1,437. The upper target is the 50-day MA at 1,495 and the 52-week high of 1,555.

 On the small-cap side, the Russell 2000 — a barometer of small-cap performance and the economy — is struggling around 800. Watch for support at the 20-day MA at 779. Near-term targets include the 100-day MA of 821.

At the end of the day, the only way to survive this market is using caution and avoiding unnecessary risk to your capital.