Wednesday, January 21, 2009

Summation Indices suggest markets have a long way to fall

Just as occurred last September and May, the Summation Indices are in the early stages of a rollover top. While the rollover top does not represent an automatic meltdown in the parent indices (as indices can find support on the way down like they did in March 2008), it can give an indication as to what may happen.

In the May-Jul 2008 correction the indices gave up 15%-16.6% from peak to trough in the Summation Indices. The problem with this scenario is the indices are already down 13.5%-14.7% from their "Santa Rally" peaks and the Summation Indices are only starting to rollover.

If we were to endure a repeat of September, then we could see the indices down 39%-48% bringing the Nasdaq down to 949 and the S&P to 537 (if you split the difference in the projected range). This would bring the S&P and Nasdaq back to 1995 historical levels and the time the "New Economy" bubble kicked off in earnest.

Whatever happens, the Summation Indices (as are other breadth indicators) are suggesting been long the market is the wrong place to be; seeing how the indices behave at November lows will give an inkling as to what to expect for the year ahead.

Dr. Declan Fallon, Senior Market Technician, the free stock alerts, market alerts and stock charts website