What are the Monthly Index Charts Revealing?

Jul 1, 2008: 8:46 AM CST

Last month was the worst June since the Depression – the Dow fell 10% in one month alone.  Let’s look at the structure of the monthly index charts to see what their story tells us about the possible future.

Dow Jones:

The key feature of this chart is that price has closed beneath the rising 50 period EMA for the first time since 2003.  Also, there is no longer any moving average support from the key 20 or 50 month moving averages.  Two times in 2008, the 50 period average served to halt the market declines (which magically corresponded with the Fed bail-out in both occasions… but there were also likely program buys at those levels).  This time, buyers were unable to overcome supply.

The path of least resistance now appears to be to the downside on a longer-term basis, and the closing of the month of June has declared a more ominous sign:  It officially confirmed a downtrend in the Dow Jones Index (in terms of a lower low in January, a lower high in March, and taking out the lower low in June).

The situation looks slightly more sinister on the S&P 500.

Although the Dow is just slightly under its January 2000 peak (at around 11,750), the S&P is clearly and undeniably beneath its 2000 peak (at 1,550).

The past appears to be repeating itself in this chart, with price first failing at the 20 period moving average, supporting at the 50 period, and then crashing through it for the next two years (it served as resistance in early 2002).

Price has broken its rising 50 period moving average and is around 30 points shy on making new lows for the year, but taking out the lower (intramonth) low from March.  On a closing price basis, the market has already taken out its closing low.

Also, notice volume in all indexes has surged above its yearly average, as we can see increased participation, but also increased urgency as prices have fallen.

The S&P is down 8.6% for the month – not as poor a showing as the Dow, but stunning for long-term investors nonetheless.

Continue to monitor the larger (primary) trend very closely, and note that its structure will help shape analysis and opinions of direction on the shorter or intermediate timeframes.

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