THE BEAR IS BACK, SAY CHARTISTS / BARRON´S MAGAZINE ( A MUST READ )

Up and Down Wall Street

WEDNESDAY, MAY 16, 2012

The Bear Is Back, Say Chartists

By RANDALL W. FORSYTH

Actually, it's just reawakening after having been lulled to sleep by central bankers

If you laid all the economists in the world end to end, they still wouldn't reach a conclusion. By contrast, a large cohort of technical analysts is remarkably unanimous in their view of the stock market's direction -- down.


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Richard Russell, the dean of the chartists who still is at it penning the Dow Theory Letters after more than half a century, declares the bear is back.


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"I've been saying that a primary bear market started in 2007 and that this bear market was interrupted by a terrified Fed in 2009 -- interrupted, but not ended. Once the primary trend of the market is established, it will go to its conclusion despite the best intentions of the Fed, the Treasury, Congress and the president," he wrote to his subscribers Monday.



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He also noted the Dow Jones Industrial Average had fallen nine sessions out of the previous 10. Tuesday made it 10 for 11, which Russell suggested might allow for a bounce from an oversold extreme. But his message Monday was unequivocal: "My advice now is to get OUT of all common stocks, gold mining included and most ETFs.


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This bear promises to take no prisoners. Subscribers who lose the least over the next two or three years will be the heroes."



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John Mendelson equally deserves to be called a dean of technical analysis. And from his present position at ISI Group, spies negative portents in a variety of charts. In particular, the Value Line Index, a democratic measure that gives equal weight to 1650 stocks and represents the broad market exhibits a number of negative characteristics, he writes in a client note.



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The Value Line index "failed to make a new high above its 2011 top during this winter's rally, (2) halted its winter advance in early February and began to move sideways, (3) decisively broke its uptrend line from the October lows in early April suggesting the formation of an important top in mid-March. I would also note the presence of a near-term "head & shoulders" top which is close to completion by breaking down from recent lows. I believe the [Value Line] chart indicates an important correction is underway."



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Similar negative signals are being sent by other indices, notably financial stocks as represented by the NYSE Financial Index and the KBW Bank Index. Finally, the Russell 2000 index of small-capitalization stocks, which Mendelson says often leads the overall market, exhibits the same pattern of failing to top its 2011 high, peaking in February and then forming a head-and-shoulders formation that tends to portend a top.


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Walter Zimmerman, who heads technical analysis at the United-ICAP advisory service, advised clients Friday if the New York Stock Exchange Composite Index were to break decisively blow 7719, "then it is all over for the bulls." Tuesday, the NYSE Composite closed at 7635.81, down 69.64 or 0.9%, which would count for a decisive break.



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Zimmerman asserted here a couple of months ago that stocks were headed into a "perfect storm" ("The Worst of Times to Buy Stocks?"), which would seem to describe aptly the deterioration of the European debt crisis, slowing growth in China and tepid growth in the U.S. with a looming "taxmageddon" in 2013. To him, the charts indicate a "powerful and relentless" decline is just starting.



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The good news, such as it is, is that a real buying opportunity is shaping up for February 2013. That's the view of Woody Dorsey, whose Market Semiotics advisory comes from Castleton, Vt. The recovery from the "wonderful capitulation low" of October 2011 has run its course. "Don't become caught up in the short term," which might feature some pops.
Instead, brace for declines into early October with a lower trend into next February, he advises.



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All of which echoes what Barrons.com technical guru Michael Kahn wrote last week: "Stocks Are Primed for an Ugly Slide".) The head-and-shoulders in the Standard & Poor's 500 was ominous then, and the decisive breaks of the index's 50- and 100-day moving averages indicate a breakdown in the market's trend.



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To take advantage of the potential to buy beaten-down stocks next February, an investor needs to have cash to invest. If the bear decimates your capital, you won't have any to invest when the right time comes.



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There's a saying among traders that the hardest trade is the right trade. Going to cash that yields zero is the hardest trade and made more so by central banks that are keeping a lid on interest rates.