Exercise Caution Before Jumping into the Markets

The markets are continuing to languish and are edging toward the downside after the four percent sell-off that occurred on the Dow last Tuesday. Since staging an unimpressive bounce of 52 points in the following session on February 28, 2007, the markets are continuing to have a downward bias, as the Dow and NASDAQ have edged lower for three straight sessions to Monday.

The Dow may even test some support at 12,000, while other key markets are also continuing to trend lower in a continuation of the correction.

The new-high new-low ratio (NHNL) on the New York Stock Exchange (NYSE) has been below 70% during four of the last five sessions. This has occurred after being bullish for the five-month period that lasted from September 26, 2006 to February 26, 2007. I’m not concerned about the current decline, unless it reverses to a downward trend.

The NHNL on the NASDAQ has been weak, with five straight sessions sitting below 50% — after being largely bullish since October 5, 2006.

The near-term signals for the NASDAQ are bearish and the Relative Strength Index (RSI) is extremely weak. The NASDAQ is oversold at this time, so you should expect to see some buying support. Also, the NASDAQ fell below its previous trading range between 2,400 and 2,500. The index is trading below its 20-day moving average (MA) of 2,471 as well as its 50-day and 100-day MA of 2,454 and 2,423, respectively. The index is above the 200- day MA of 2,286.

On the blue-chip side, the near-term technical picture for the large- cap Dow is bearish, while the RSI is extremely weak. The index fell below its 20-day MA of 12,583 as well as its 50-day MA of 12,532. You should watch for this, as the index is currently oversold. You’ll also find that the support is currently at 12,000.

The S&P 500 is back to its multi-year support at 1,380 to 1,390, which occurred after the sell-off. Near-term technical signals for the broadly based S&P 500 are bearish and the RSI is extremely weak. The index is trading below its 20-day MA of 1,439, as well as its 100-day MA of 1,408. You should watch for a possible oversold condition. You’ll find that the support is at 1,380 and 1,340 respectively.

On the small-cap side, the near-term technical signals for the Russell 2000 — a barometer of small-cap performance and the economy — are bearish. The RSI is extremely weak. The index broke back below 800 and is now trading south of its 20-day MA of 810. You should watch to see if the index could rebound back above 800. Support is found at the 200-day MA of 746. Also note that the index is currently oversold.

Other than the oversold condition, you should note that the Chicago Board Options Exchange (CBOE), the NASDAQ Volatility Index, as well as the CBOE S&P 500 Volatility Index (VIX) are all heading higher in the near-term — this could indicate a near-term top.

I advise waiting for more positive technical signals before jumping headfirst into this market.