Friday, May 28, 2010

US Market in May 2010 in Longer Perspective

The Dow Jones Industrial Average registered the biggest monthly drop since the market turned in March 2009. It's hard to assess the magnitude or the significance (if any, in this age of algo bots) by just looking at daily or weekly chart.

So here you go, the Dow 10-year monthly chart:

It was indeed a nasty big red candle that was formed in May. Not that the market bulls want to hear, but the drop of this magnitude doesn't seem to happen in an uptrending bull market.

After the dot-com bust, which Dow Jones didn't quite suffer, the market finally bottomed in 2003. If you follow the candle formation after 2003, both up-months and down-months had smallish candles, and the movement was gradual until the final run to the top, which started in the middle of 2006.

In contrast, at market tops (in 2000 and 2007), the candles get bigger - bigger bodies and/or bigger shadows. The candle that formed in May fits the pattern.

Also notice the index hit the 40-SMA in April and May, and couldn't stay above it. The index stayed above the moving average almost the entire run from October 2003 to June 2008, when it decisively broke below.

Slow stochastics set at 120 has yet to reach above 60 in the most recent run since March 2009. MACD is still in negative territory. (Thus the argument by some TA people, most notably Elliott Wave people, that this hasn't been a secular bull market but a counter-trend rally within the bear market.)

One month doesn't make a trend of course, but looking at the sheer size of the May candle, "Sell in May and go away" may prove to be the right strategy, again.

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