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Mapping Out the Bear Tracks

This column was originally published on RealMoney on April 3 at 7:25 a.m. EDT. It's being republished as a bonus for readers. For more information about subscribing to RealMoney, please click here .

I believe the U.S. economy will slip into a recession over the next two years and that U.S. stocks have entered a bear market . My main reason for these predictions is stress in the banking system caused by the weak housing and real estate markets.

While fundamentals are clearly deteriorating, the technicals on the major equity averages are showing some negative divergences. However, they're not yet weak enough to confirm the bear market based on pure technical analysis.

Complacency vs. Wishful Thinking

The major equity averages turned in mixed performances for the first quarter, but only the Dow industrials and the semiconductors ended the quarter lower. During the quarter, several indices, such as the Dow Jones Industrial Average, the S&P 500, the Nasdaq, the Dow Jones Transportation Average and the Dow Jones Utilities Average, set new all-time highs. However, the increased volatility, which we've seen since I made my bear market call on Feb. 20, is typical of a market setting a multiyear high amid numerous bear tracks.

In February, the bulls became complacent but stayed the course even after the Dow plunged 416 points on Feb. 27. The volatility since then is normal, say the bulls, but in my judgment that's just wishful thinking.

Let's take a look at the averages.

First-Quarter Scorecard
Market Current Price % Gain or Loss 2006 Close 2007 First Half High Percent Off High 2007 First Half Low
DJIA 12,354 -0.9% 12,463 12,796 -3.5% 11,940
S&P 500 1,421 0.2% 1,418 1,462 -2.8% 1,364
Nasdaq 2,422 0.3% 2,415 2,531 -4.3% 2,332
Utilities 500.18 9.5% 456.77 505.15 -1.0% 443.78
Transports 4,811 5.5% 4,560 5,211 -7.7% 4,565
Russell 2000 806.00 1.4% 794.90 831.5 -3.1% 756.10
The SOX 465.57 -0.3% 467.04 492.27 -5.4% 448.57

First, the Dow Jones Industrial Average slipped 0.9% in the first quarter of this year and fell 3.5% from its all-time high of 12,796 set on Feb. 20. The Dow is between my new quarterly pivot at 12,312 and my semiannual pivot at 12,492. With declining weekly momentum, a weekly close below 12,312 is more likely than a weekly close above 12,492.

On the daily chart, you can see that the Dow is below its 50-day simple moving average at 12,454, which indicates risk to the 200-day simple moving average at 11,900.

Dow Jones Industrial Average
Click here for larger image.
Source: Reuters

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Chart of I:DJI
DOW 17,773.64 -57.12 -0.32%
S&P 500 2,065.30 -10.51 -0.51%
NASDAQ 4,775.3580 -29.9330 -0.62%

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