TUNE OUT DOW 10,000 MANIACS / BARRON´S GETTING TECHNICAL

Wednesday, October 14, 2009

GETTING TECHNICAL

Tune Out Dow 10,000 Maniacs

By MICHAEL KAHN

Round numbers like DJIA 10K attract media attention, but look to technical trends and breadth for clues to stocks' direction.

THE DOW JONES INDUSTRIAL AVERAGE TOUCHED the 10000 mark Wednesday for the first time in just over a year. Round numbers like Dow 10000 may grab the attention of the general public and the media, but to technical analysts the real question is whether such milestones will actually translate into investors' action -- either eliciting new buying or profit-taking.

I say neither.

For technical analysts, milestones such as Dow 10000, in and of themselves, have no real meaning as support or resistance if we look at the charts. As such, I do not see it as a trigger for more buying, as if the market broke out above a resistance level, or selling, which would be expected if the market fell below a support level on the charts.

Two other factors are much more interesting, technically speaking.

The first is the pending battle between the rising trendline from the March low and the falling trendline from the October 2007 peak (see Chart 1).

Chart 1




















This market has confounded many, myself included, so I am not going to depend solely on the strict interpretation of lines on a chart. But this is the first time since early last year that such major trendlines are about to meet. The convergence is roughly 10300, which could be reached sometime next month. Let's use that for a framework for analysis, not a prediction.

Adding to its importance, the Dow will have retraced 50% of its bear market in this zone. Many technical analysts deem a 50% retracement move to be significant. Again, does such a recovery spur investors to take action, either buying or selling? Probably not, but let's just add it to the framework. Two trendlines and a major retracement level all converging in one place do bear watching, however.

The Standard & Poor's 500 also is closing in on a milestone at 1100. As with the Dow, there are no major peaks and troughs at this level to suggest any magic other than its round number status.

There is, however, one difference. The rising March trendline and falling October 2007 trendline are set to meet at this round number soon (see Chart 2).

Chart 2


















Here, too, we have a confluence of technical levels as the S&P 500 will have retraced 50% of its bear market at 1120.

The Dow and S&P 500 do not agree in terms of how high the general market will move before it faces respective trendline showdowns. It is a major reason why neither indicator is a slam dunk for the bulls, but both do suggest the trend is still up.

Let's move on to the other factor I am watching -- market breadth. Here, too, there are no problems at this time.

The number of stocks reaching 52-week highs on the New York Stock Exchange remains healthy, and the number of stocks reaching new lows is negligible. That is what we would expect to see after seven months of gains.

What would be a problem is if the number of new highs was to shrink each day. That would tell us that the leaders in the advance have stumbled and would suggest that the market's underlying trend has changed for the worse.

Another positive breadth reading comes from the advance-decline line. This indicator sums the number of stocks rising each day and subtracts the number declining. The difference tells us if the soldiers are following the generals higher.

So far, so good. What typically happens before a rally ends is that the advance-decline indicator starts to falter. It does not have to be a steep drop, but if more stocks fall each day than rise -- even when the major indexes rise -- that could indicate a problem.

While Dow 10000 and S&P 500 1100 attract popular notice, there really is no magic here. For clues about the stock market's near-term course, watch the major trendlines and breadth, not the simplistic, round numbers that mesmerize the media.

Michael Kahn, mutual fund co-manager, author of three books on technical analysis, former Chief Technical Analyst for BridgeNews and former director for the Market Technicians Association, also blogs at www.quicktakespro.com/blog.

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