For the last several weeks Dennis Slothower has been warning investors that the market was risky and subject to dropping during the August to mid-October time frame. That has certainly proved to be true this year. The vast majority of stocks have been falling sharply.
However, Slothower wants you to keep in mind that, technically, the market is still in a sideways trading channel. Nothing has really changed except that a strong test of the bottom of the trading channel is underway.
So far, the bears have not succeeded in breaking the trend down below the trading channel support. Slothower knows many of you believe this about to happen −− but until the market proves the bears correct, he recommends you stay largely neutral with high cash positions.
This oscillation has been maddening −− it seduces you into thinking that a primary uptrend is re-emerging, as was seen in August. Then just as quickly, the market reverses itself. It is now testing the bottom of the trading channel and looks like it is about to drop off a cliff.
It’s like a game of ping-pong with the ball being whipped back and forth, getting faster and faster as the players get closer to the net. Sooner or later you know the ball is going to slip past one of the players. But until it actually happens, you don’t know which player to bet on.
At this point, the bull’s defense at the primary support trend lines is being tested. This is a crucial test that the market must work out – unfortunately, a whipsaw market that has proved over and over again how deceptive it can be.
The bears have been able to get the trend below the 200−day moving averages, so clearly, they have an advantage. But, officially, the trend is still holding above the monthly middle Bollinger Band line for the majority of indexes.
This means that the primary trend is still in the bull’s camp and until this support is penetrated, Slothower thinks you have to view this market as another intermediate correction, rather than the beginning of a new bear market.
For the Russell 2000, primary support rests at 600−610. For the S&P 500 index, it is at 1164, which was tested last week. The Nasdaq Composite must hold above the 1985−2000 level. The Dow must hold above 10,000. These are key primary support levels. If the market holds above these levels, then we should all get ready for the next intermediate advance, soon.
Remember that major bottoms often develop in October, with the market rallying in the fourth quarter. Slothower wouldn’t count the bulls out just yet. They have repeatedly rescued the market over and over again at the primary support trendline.
If third quarter earnings come in better-than-expected, the bulls may gain the upper hand and the stock market will rally. Slothower has been impressed recently with the growth rate in the money supply, which is now growing at 6.0%. It was 4.8% only a week ago, and the weeks before that, 4.3%, 3.7% and 3.4%, respectfully. Clearly, liquidity is growing −− bullish for the market.
However, remember that below the monthly middle BB line is where bad things happen. Bear markets develop quickly when the trend is incapable of sustaining itself above this key measurement.
Slothower can’t say whether the bulls will be able to hold the market above this key defensive level or not. He can say that it doesn’t look good. But the market has held key support at its first test −− the last few days it is starting to firm up.
This rebound has generated a little buying interest, but if the bulls are going to successfully turn the intermediate trend to their favor, they have to drive the indexes back above last week’s highs on this short cycle advance. Slothower doubts they will be able to do so, but he doesn’t want to close his mind to its possibility, either. The market is neutral and that is the way you should have your mind set −− let the market prove itself before making any major commitments.
Slothower does have to say that crude oil prices remain a serious threat to the market. Crude oil prices have held support at the weekly middle Bollinger Band line. This is a huge wild card. Crude’s weekly stochastics are now oversold with %K at 7 and %D at 17, suggesting oil could be getting ready for another advance.
If oil surges back up to $70 a barrel, or higher, it is hard to be optimistic about the fourth quarter. This is simply a very tricky market. You will best be served by letting the market tell you how to play your hand. In the meantime, remain largely in cash, waiting for the market to decide whether we have seen an intermediate-term correction or if a new bear market is about to be begin, below the monthly middle Bollinger Band lines.
This article highlights the commentary of Dennis Slothower for the Zacks.com audience. Dennis Slothower provides insightful analysis, market commentary, and favorite recommendations on a timely basis in "Stealth Stocks" newsletter. Try it free for 30 days and see if you can improve your investment performance. Learn more about "Stealth Stocks" and 30-Day Free Trial. And get immediate access to current issues and special reports. Click here now.
Sponsored Links 
