MACD, Fibonacci, and Other Technical Reasons to Feel Good

from WSJ.com: MarketBeat by David Gaffen

Rob Curran reports:

The current bear-market bounce may give the Standard & Poor’s 500 another 10% of gains without reversing the longer-term downward trend of the stock market. But things might turn around after that, chart-watchers say.

Fears about the solvency of the financial system may have subsided, but not so the longer-term threats to the stock market, and some believe the market has not accounted for this entirely. “The consensus [earnings estimates] have been adjusting down for some time but is still out of date,” said Binky Chadha, strategist at Deutsche Bank.

Nevertheless, technicians say the market is in a midst of a recovery from the October crash. The S&P 500 fell 17% in October, but was down more than 27% for the month at its nadir.

While an 12% bounce on Oct. 13 barely lasted a week, the current recovery, which began on Oct. 27 and has taken the index up 15% from its closing low of 849 to around 975, appears to have more staying power, at least for the short term. That’s based on market internals and sentiment indicators.

Among those the chart-happy-types look at is MACD. That’s a momentum indicator based on a confluence of moving averages, and it flashed buy signals for the first time since early September, said Katie Stockton, chief market technician at brokerage MKM Partners.

Second, the Chicago Board Options Exchange market volatility index, an indicator of investor sentiment that reflects the cost of premiums to protect portfolios the options market, showed a peak in panic. The VIX, or “fear gauge,” hit a closing peak of 80.06 on Oct. 27, and has since retreated to 56. If the VIX closes Monday below 53, it would be the lowest close since early October.

The elevated levels of fear made last week a good time to become a bull, said Carter Worth, chief market technician at Oppenheimer. “I’m looking for 1075 on S&P 500 as the objective for this current period of strength,” Mr. Worth said, recommending stocks until such time as the S&P 500 hits that level.

Similar to Worth, Ms. Stockton said the S&P 500 has the potential to reach 1120, based on a “Fibonacci retracement of its decline from the October 2007 high.” Fibonacci retracements are a popular technical tool and rely on a series of ratios identified by Leonardo Da Vinci in a series.

Nevertheless, “We would view a recovery rally as an intermediate-term move within a long-term downtrend,” Ms. Stockton said. The market has made a series of “lower lows” as every recovery since August 2007 has failed, and usually a recovery involves a series of higher lows, or successful tests of support.