Technical Analysis of the major averages

Let me preface this by saying, I am no expert in technical analysis. However to ignore it (the witchcraft of it all) would be akin to a carpenter leaving a major tool at home. I try to explain technical analysis to anyone new to the market with a silly example such as: "If on Tuesday's in Miami when the temperature is at least 90 degrees, people buy 10x as many sweaters as usual."

Now on the surface that makes little sense - but if you see a trend that happens over and over, do you ignore it? No. You become a seller of sweaters in Miami on Tuesdays when it's over 90 degrees to take advantage of this trend, even if it makes little sense. That is sort of how I view technical analysis - when I know thousands (hundreds of thousands?) of traders, from retail to institutional make decisions in part due to 'charts', why would I ignore them?

With that said, my understanding and usage is simple, basically moving averages, volume, and I play with the MACD every so often, but mostly the former 2. Tonight I pulled up all 4 major averages to see what they look like. 3 of the charts are identical: DJIA, SP500, NASDAQ. What you see (one day I will learn how to post a chart in the blog), are indexes that broke below their major long term support level (200 day moving average) mid August, and have since punctured back through that level and now have reached the next level of trendline, the 50 day moving average which is now 'resistance'. Literally, all 3 indexes are butting up against these levels with their highs of the days yesterday and today. And have fallen back (so far).

Now the Russell 2000 is an interesting and more scary chart (for longs). I have posted many times in the short history of the blog that the indexes are not telling the whole story... that underlying statistics, advance declines, volume advancing/declining, is much poorer. Well the Russell 2000 shows this. Unlike the other 3 indexes which generally contain lager, global stocks (i.e. flight to safety), this chart shows an index which cannot break through its 200 day moving average (right at 800). Worst, the 50 day moving average is fast approaching on a downward slope the same level (currently at 804).

So first we have an index which is unable to break its long term moving average. Second, technical traders have an ominous term (remember, it's 'witchcraft') called the "death cross", which is when a short term moving average crosses below a long term. With the 50 day and 200 day moving averages being the most commonly used, we have the potential here of the 50 day moving below the 200 day very soon if the market does not continue its strength. Looking back the past 2 years, this happened last in August 2006... and there was a close convergence in spring 2005 and summer 2004. So it does not happen that often.

This doesn't imply end of the world; but it bears watching. Also it confirms what you see day to day looking at this market - while the indexes are doing pretty decently, there is a lot of underlying damage being done to a large % of individual stocks.

Short my technical analysis abilities