For a longer-term read here, following is Hill's market overview as of midday yesterday, which he has kindly allowed me to post:
***Market Overview***
The long-term trends remain down for the major indices. At best, the S&P 500 and Dow have entered trading ranges marked by the Jul/Oct lows and the Aug high. Yes, there could be double bottoms forming as well, but these remain potential and unconfirmed so far. For the Nasdaq 100, the index remains with a lower low and below the Sep-00 trendline. Combined with the absence of a higher high, it is impossible to label the trend bullish. The medium-term is still up for grabs with the consolidation over the last 2-3 weeks holding the trend hostage. The consolidation turned unruly this past week with attempted breakouts that quickly failed. The S&P 500 and Nasdaq 100 both broke to new reaction highs, but failed to hold. More importantly perhaps, these reaction highs were followed by lower lows that broke trading range support levels. Neither the upside breakout, nor the downside break held and the indices returned to the comfort of their prior trading ranges.
Perhaps the Dow holds the key. Whereas both SPX and NDX broke to new reaction highs last week, the Dow remains with a series of lower highs that began with the 21-Oct peak at 8547. This pattern looks like a falling flag over the last few weeks, but the lower highs show buyer impotence over the short-term. Volume has declined within the falling flag, which is normal, but should increase to validate any breakout. At the risk of more whipsaw, it may be prudent to widen breakout targets or attempt positions closer to support. In addition, simultaneous breakouts in S&P 500, the Nasdaq 100 and Dow would help confirm broad strength. The key bullish breakout levels are: Dow 8550, S&P 500 907 and Nasdaq 100 1007. Notice that these levels are just above key resistance on the 60min charts. Such moves would signal a continuation of the prior advance and project further strength over the next several weeks.
This week we will take a look at the following: Nasdaq 100, S&P 500, Dow Industrials, Breadth, Styles (small-growth) and Sectors (finance).
***NDX Long-Term***
On the weekly candle chart, NDX advanced three weeks straight with three long white candlesticks and started getting selling pressure this past week. The formation could be three white soldiers (notice that each open was below the prior close), but the final candlestick was the shortest of all three and reflects waning upside momentum. The move is strong nonetheless, but has yet to exceed key long-term resistance at 1060. NDX broke the upper trendline of the flag, but has yet to forge a higher high. Combined with the lower low at 795 and trendline extending down from Sep-00, none of the key ingredients for a trend change is in place (higher low, higher high and trendline break). 13-week RSI formed a positive divergence and NDX is outperforming COMPQ, but price is the final arbiter and has yet to confirm with a trend change. On the daily candle chart, I have tweaked the rising flag trendlines as well as key support/resistance. The lower trendline was lowered, key support moved up to 960 and key resistance to 1010. Selling pressure is mounting with two dark cloud patterns and a momentary break below 950. The index made a move to exceed 1000 on Thursday, but ended with a doji as buyers failed keep the pressure on. For now, we are at the mercy of the trading range. A move above 1010 would be bullish and a move below 960 bearish. The next big resistance level resides around 1060 and a 50% retracement of the prior advance would carry to around 900.
Long-term trend: Bearish – The move off the October lows has been impressive, but volume is still lacking. Maybe low volume will create the wall-of-worry as uncertainty reigns. Not once has daily volume exceeded the levels seen in July or even been above 2 billion shares. Big reversals require a lot of fuel. The initial liftoff was strong, but I would want to see continuation with more volume. As an investor, I would like to see proof with a move above 1060 and then look for a pullback to catch the second leg. None of the three ingredients of a trend change is in place and the downtrend has yet to be proven otherwise. Another alternative is to scale into a position. For such a strategy, a move above 1010 could be used for an initial long with an eye to add at a later date.
Potential Support: 770 KEY Resistance: 1060
***SPX Long-Lerm***
On the weekly candle chart, SPX advanced with two strong weeks and has since consolidated with two flat weeks. The result is a flag on the daily charts and hesitation at 900 on the weekly chart. The trendline break is medium-term positive, but the key long-term trendline (from Oct-00) marks resistance above 1000. Between 1000 and 900 lies key long-term resistance at 965, a break of which would confirm a double bottom reversal. Even though the July and October lows are relatively equal, the October low was a whisker lower and 2-3 weeks of trading occurred below 850. In essence the October low was a lower low, the index has yet to forge a higher high and the key long-term trendline is still far away. There may be arguments for a medium-term trend change, but the long-term downtrend has yet to be proven otherwise. On the daily candle chart, SPX remains in a state of consolidation. Now that this consolidation has progressed for two whole weeks, the prior advance can be set from 768 to 900. A move above 900 would signal a continuation of that advance and project further strength to around 1000 (900 – 768 = 142, 875 + 142 = 1017). There have been false breaks below 875 and above 900 this past week and the risk of whipsaw is always present. The odds still favor continuation over reversal, but we should be prepared for both. To reduce the chances of whipsaw, the breakout level could be raise to 908 and the support level to 867.
Long-term trend: Bearish – The October advance certainly looks strong on the daily charts, but has only retraced 62% of the prior decline and remains in the middle of the double bottom on the weekly charts. Based on both charts, there are two key levels to watch: 908 and then 965. Without a break above 908, resistance at 965 becomes insignificant. With the daily chart suggesting that a move above 907 would signal a big continuation, I would look to scale into longs at this level (e.g., small positions).
Potential Support: 776 KEY Resistance: 965 – watch 907 medium-term
***Dow Industrials***
On the weekly candle chart, the Dow advanced two weeks and stalled for two weeks. Volume peaked the first week of October and has declined the last three weeks. The second and third weeks of the advance were on less volume. The consolidation this past week on low volume is OK, but any continuation move should be on expanding volume. Chart-wise, the facts are as follows: lower low, descending price channel and absence of a higher high. By definition, the long-term trend has yet to turn bullish and the average is current in the middle of a potential trading range (9100 – 7500). On the daily candle chart, the Dow has a consolidation working with support around 8270 and resistance at 8550. As long as this range holds, trading is likely to be choppy. A move above 8550 (on good volume) would signal a continuation and project further strength to around 9600 (8500 – 7200 = 1300, 8300 + 1300 = 9600). But it ain’t broke until it’s broken. Without a continuation move, this rally is just another bear market rally that retraced 62% and ultimately failed.
***NDX & SPX Breadth***
For NDX, there were some short-term warnings before the August rally and medium-term warnings before the October rally. AD Volume Net% (advancing volume less declining volume divided by total volume) began to improve in July and the 20-day SMA formed a sharp positive divergence. The indicator moved above +10% in mid October and remained above until mid December. As long as it holds above +10% breadth should be strong enough to support the rally. A move back below would show waning breadth that would unlikely be able to sustain an advance. For the medium-term and the AD Volume Line, the 5-day EMA moved above the 50-day EMA. Also, the McClellan Summation Index formed a sharp positive divergence and moved to a new reaction high. Both of these suggest some strength behind the latest move and have yet to turn down.
SPX breadth is strong, but not as strong as NDX breadth and this should be of concern for the bulls. Whereas the 20-day SMA of AD Volume Net% moved to new highs on NDX, the indicator remains below its August high on SPX. Similarly, the 5-day SMA of the AD Volume Line is just now about to cross the 50-day SMA – a little late to the party. The same cross occurred a week ago in NDX breadth. For this rally to have legs, the broader market needs to participate and participation needs to widen.
***Styles***
As the market consolidates over the last 2-3 weeks, the value end of the spectrum has gained strength. This is especially true for large-value versus large-growth. However, this appears to be a short-term phenomenon and the larger trends still favor growth over value. The large/small differential is less obvious than value/growth. Large-growth led the advance over the last few months, but recent rumblings in small-growth suggest that this group may be poised for some strength.
Like many indices and stocks, the Small-cap Growth Index (IJT) has a flag working over the last few weeks. The stock moved above resistance at 63 and this level turned into support over the last few weeks. A harami, two dark cloud cover patterns and a hanging man formed during this trading range, but the index failed to close below resistance-turned-support at 63. Volume even expanded on the decline (Mon/Tue), but expanded even more on the rebound (Wed/Thur). The key remains resistance at 65.5. A move above this level would project further strength to around 72 (65.5 – 56 = 9.5, 63 + 9.5 = 72.5). The potential bearish candlesticks are of concern, but not until confirmed with a support break at 63. There are three strategies for taking a position: buy on the breakout, wait for a breakout and buy on a pullback to resistance-turned-support or turn to the intraday charts to catch a bounce off support to enter around 64.
***Sectors***
Basic-industry, industrials and energy remain the weakest sectors – relative to the Wilshire 5000. Pharma (XLV) and consumer non-cyclicals (IYK), two of the strongest in recent months, have underperformed over the last three weeks. I would expect underperformance during a big advance, but not during a consolidation phase. The price relative (IYK divided by Wilshire 5000) broke below the trendline extending up from Jan-02 as performance suffered from 11-Oct to 31-Oct. Tech, telecom and utilities, three groups at the bottom of the performance rankings a month ago, have been perking up lately. The price relatives for tech and telecom bottomed at the beginning of October and broke long trendlines this month. The price relative for utilities bottomed two weeks ago, but has some work to do before challenging a trendline.
Although finance (XLF) was a strong performer in October, the price relative is all over the place and I find it hard to get a grip on the sector. In early October, the price relative moved to its lowest level since early April, indicating serious underperformance. However, the price relative shot back to within spitting distance of its highs 10-days later. Overall, the price relative has been flat since July and XLF is just below the levels seen in early July. As with the rest of the market, XLF formed a consolidation over the last three weeks. The prior move occurred with two gaps and was largely over within four days, which smacks of emotion. Nevertheless, a move above 23.3 would signal continuation and have to be considered bullish. Considering the large part that financials play in the S&P 500 and NYSE Composite, such a move would be bullish for the overall market too.
forums.delphiforums.com |
