Technical Quicksand
By Fernando Gonzalez, Online Trading Academy (24/10/2006)

• The Monthly overlay line charts comparing the DOW, S&P500 and Nasdaq-100 address the Long-Term Time Horizon (1 to 3 year)
   
• We've scaled the chart so that we can properly compare the extent of the recovery of these major market measures over the last 4 years. It doesn't take much analysis to note that the DOW is the strongest of the lot, the S&P500 is not too far behind, but still trading below its prior all-time high, while the Nasdaq-100 is still basically in a coma.
   
• What is the significance of this for a long-term investor? ... or for Short-Term trader? It has a great significance for all. That's because it suggests exactly what environment we are in. The long-term environment bears a great weight on participants of all time frames, in the same manner that the weather or climate would affect inhabitants of any particular location. A Bull market environment is one that has no ceiling, and a Bear market is one that has no floor, and either one will stretch beyond the imagination of most participants. These characteristics stretch farther beyond magnitude and direction, but also pace or speed, the combination of which greatly affects all participants.
   
• In our chart above, it is difficult to say that the markets are in Bull-mode just because the DOW is at an all-time high - take one look at the condition of the Nasdaq-100, which represents the market's speculative arm, and you might ask yourself how the markets can be in Bull market mode when there is little evidence of rampant speculation. On the flip side, we would be hard pressed to label this as a Bear market environment when the premier measure of Blue Chip stocks is trading at an all-time high. So what is it? Well there are times when it is wise to be long-term Bullish, times to be long-term Bearish and times to remain long-term Neutral, this would perhaps be among those times. There is just too much bifurcation going on across the markets that it would be wiser to label Intermediate-Term trends as unsustainable. And since the most recent Intermediate-Term trend has been up, it should not be too far fetched to mark the most recent uptrend as unsustainable, despite the DOW trading at all-time high…
   
• Our posture here is no different from that we noted on the previous S&P500 chart, the market has now entered that zone and it would be wise to switch from what was a short-term Bullish posture to short-term Neutral, which our Intermediate-Term posture is in Neutral. Same as the S&P500, let's look for the market to give us a significant reaction to this resistance zone over the next 10 Trading days - the DOW and the rest of the equity markets should be running into some quicksand here.