Understanding the Market: Technicals Lead the Fundamentals
02/07/08 - 11:08 AM EST
Mark Manning
Editor's note: This column was originally published on RealMoney on Feb. 6, 2008 at 2:44 p.m. EDT. It's being republished as a bonus for TheStreet.com readers. It is a follow-up to Mark Manning's column "Indices: Pay Attention to the Trend to Understand the Market." For more information about subscribing to RealMoney, please click here.
The market was pummeled yesterday [Feb. 5] after a report came out that the U.S. service industry fell into recessionary
levels during January. This is a major concern because the service industry accounts for more than 90% of our economy.
The S&P 500, DJIA and the Nasdaq all fell close to 3%. Yesterday's plunge came on very high volume , with declining stocks crushing advancers by a 4-to-1 margin.
While many market pundits are now jumping on the recessionary wagon, the market has been giving warning signals for months. I have continued to caution investors to stay away from the pure fundamentalists who continue to preach that everything is OK and that investors should remain heavily invested.
Although fundamental information is very important in any type of research, these analysts and commentators need to understand that the market leads the economy, and fundamentals follow. Because the markets follow this scenario repeatedly, it is amazing that these people never figure this out.
Eventually, there are going to be some great buying opportunities in this market, and having a large chunk of cash to buy the new emerging leaders when the market turns will be the best way to maximize returns.
Right now, though, it is a good time to do your research and build a watch list of solid companies that you want to add your portfolio when the market firms up.
Let's take a look at the charts.
A few weeks back, I gave upside targets on the major indices of where the bear market bounce was likely to end. I said that the Dow would likely move up to the 12,750-13,000 level before resuming the downtrend. It moved up to 12,767 before reversing yesterday. Looking at this two-day chart, it now appears that we will probably test the January lows. If those lows do not hold, the next support levels are down around 11,000.
| Dow Jones Industrial Average |
 |
| Click here for larger image. |
| Source: TC2000 |
I said that the S&P 500 index would likely bounce up to the 1400 area, and that is exactly where the retracement ended. If the January lows are broken, we will probably see a move down to the next support level of 1200-1250. You can also see at the bottom of the chart that the institutional
money stream also continues to be in a downtrend.
| S&P 500 |
 |
| Click here for larger image. |
| Source: TC2000 |
The Nasdaq composite has fallen almost 18% since the October high, and it looks like those losses are going to continue. It now appears that the index will lease test the January lows. A failure to hold those levels would put the index at a risk of testing the 2000 to 2100 level.
| Nasdaq |
 |
| Click here for larger image. |
| Source: TC2000 |
I have continued to urge investors to avoid the financial sector, even though many commentators continue to try to call a bottom. I don't understand why everyone wants to predict the exact spot this decline will end. What I do know is that I have never seen a bottom in a stock or index when everyone and their brother are saying that the decline is over. Whether it is over or not should not be investors' focus. The focus should be on whether the subprime and derivative
problem has ended. I just don't see the evidence that there are not more losses to come. When we do see an actual bottom, it will likely appear when the stocks stop going down amid bad news and investor negativity.
I have said that there is a good possibility for the sector to bounce up to the $29 to $32 area. The Financial Select Sector SPDR (XLF Quote - Cramer on XLF - Stock Picks) almost made it up to $30 and has resumed its downtrend. The one positive is that the institutional money stream has been very strong, but until we see a clear break above $30, a downtrend remains intact.
| Financial Select Sector SPDR |
 |
| Click here for larger image. |
| Source: TC2000 |
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