More downside seen hounding US stocks

By Ellis Mnyandu

NEW YORK (Reuters) - If history is any guide, U.S. stock investors may have to brace themselves for what could prove to be a prolonged downbeat market as major indexes test key technical support levels, a leading market technical analyst said on Tuesday.

Louise Yamada, founder and managing director of Louise Yamada Technical Research Advisors, told the Reuters Investment Outlook Summit in New York that major U.S. stock indexes could well see further downside.

"You've already broken a three-year uptrend, which suggests that support levels are going to be more critical," she said.

Even if the stock market entered a period where it could be deemed to be in oversold territory, Yamada said there was a possibility for more selling pressure to jolt stocks before stocks attempted another breakout higher.

"During a bull market you can get away with saying, 'Oh, the market is oversold, you want to buy.' Oversold conditions are holding a little longer than they have for the past three years. So we have to stay alert to the fact that we may be in for a more corrective trend," said Yamada.

"At a minimum we suspect that we're going to experience a corrective trend, but whether or not we go to a bear market, which you define as 20 percent or more down off the highs, it isn't clear yet. It's a possibility. We can go to a cyclical bear market, within a structural bear environment."

Gains that the stock market registered earlier this year, she said, putting the Dow within 80 of points of its January 14, 2000 record high of 11,750.28, coincided with a declining number of stocks hitting new highs -- a bearish technical signal.

Recent selling tied to persistent worries about higher interest rates has pushed the Dow Jones Industrial Average .DJI off about 8 percent since mid-May, while the S&P is down by roughly a similar amount from its May peaks.

Meanwhile, the Nasdaq composite index .IXIC is down 12.6 percent from its high for the year, reached on April 19. A drop of 10 percent from an index's high is considered a correction, according to technical analysts, who study past trading patterns for clues about future performance.

According to Yamada, the Dow, which fell below 11,000 for the first time in three months last week, faces near-term support around 10,000.

But if the Dow were to break below that level, the decline could see the index targeting 9,700, which would be a new low for the index over a three-year period.

For the S&P, Yamada pegged near-term support around 1,168, but the critical level would be the 1,060 level, which, if broken, could mean the index may fall further to levels last seen in August 2004.

Meanwhile, with the Nasdaq on the verge of sliding below its current 2,000 support level, Yamada said the index would likely see near-term support at the 1,890 level. But if that level was broken, the index's next critical level would be 1,750 -- near the index's intraday low of August 13, 2004.

A support level signifies a point at which an index or a stock has difficulty falling below, and buyers tend to congregate around such a level to try to set new positions for a possible move back up.

But a lack of upward momentum, along with selling pressure, can still push the index or a stock to break below such a critical level.