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On the verge of breakdown – once again

(April 17, 2002)

After the more-than-200-point rocketship ride in the Dow Industrials yesterday, the Dow gave 80 points back today, closing at 10,220.78. If another rally is to emerge from here, a pullback would be expected. On the other hand, we could hardly believe Monday's low was the bottom, given the relatively low put-call ratios and the high complacency among investors lately.

The following two charts will give you a take on the current situation very well:

Current and Key Support Level of the Dow Jones Industrials (September 2001 to Present)

The Dow Industrials could not break above its up trend line today. Moreover, it closed below its 50 DMA, once again.

Current and Key Support Level of the Dow Jones Transports (September 2001 to Present)

The Dow Transports is in a similar situation. It is still above its 50 DMA, but not by far.

We believe it is only a matter of time before both of these indices break down from here. The big boys could only rally them so much. We know both the mid caps and the small caps have been making all-time highs, but in a healthy bull market, the large caps lead, not the other way around. What this is telling us is that the action is no longer in the large caps, and the hot money is now flooding into the less liquid small and mid caps. We would warn all our readers who are chasing these stocks to be careful, as liquidity can quickly run out of these stocks (that is, these stocks would experience huge volatility to the downside) in a general market decline.

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