Hi Judy and thread - Here's John Murphy's latest:
Update for Oct 25, 1998
NOT MUCH CHANGE Although stock averages gained some ground this week, the overall picture didn't change much. The Dow and the S&P 500 reached our upside targets in the vicinity of their 200 day averages and backed off on Friday. A lot of the rotations we spoke about last week were also evident. As bonds and utilities lost more ground, oversold sectors like the financials, oil service, and the semiconductors attracted new buying. Two other oversold groups that rallied were the small stocks and the transports. We're going to start by taking a closer look at those two sectors. We'll also clarify our short term, intermediate term, and long term views on the S&P 500.
SMALL STOCKS REBOUND Since April, the small stocks represented in the Russell 2000 Index have been the weakest portion of the stock market. That's why this week's rebound has attracted a lot of attention. The Russell 2000 bounced off long-term support at 300 (its 1996 low) and was deeply oversold. A rally was to be expected. But is this a major turnaround? Chart 1 (see Chart 1) gives a short-term view of the rally in the Russell 2000. Prices ended the week near 367, or within 10 points of its first resistance barrier near 375. Prices would have to close above that peak to signal a more substantial rebound. Even then, we see major long term resistance near 400, which also coincides with the 100 day moving average. The longevity of any stock market rally may depend on the ability of the Russell to clear that first hurdle.
NO SIGNAL IN THE TRANSPORTS Toward the end of July, the Dow Transportation Average broke support at its June low, signaling a downtrend. On August 4, the Dow Industrials broke support at 8600. Those two breakdowns gave a Dow Theory sell signal, which is being challenged. The Industrials completed a small "double bottom" when they rose above 8200 a week ago. They are now challenging the prior support level at 8600, which is now a resistance barrier. The Dow Transports rallied back to their September peak at 2900, but failed the first attempt to break it. Chart 2 (see Chart 2) shows some formidable resistance near that level. A close through 2900 would negate the Dow Theory sell signal and would shift the transportation trend higher. It would still have to rise above its 200 day average, however, to justify a bullish long-term outlook.
S&P 500 TESTS 200 DAY AVERAGE In recent updates, we put our upside targets for the Dow in the 8600-8700 region which represents chart resistance and its 200 day moving average. The corresponding numbers for the S&P 500 are 1075 to 1100. Chart 3 (see Chart 3) shows the S&P 500 testing its 200 day line near 1075. The horizontal line also shows that level corresponding with the lows established earlier in the spring. It also represents about a fifty percent retracement of previous losses. What the market does in this area is very important. We think the short-term rally probably peaked this week. We expect a setback over the next week or two, which could be followed by another upside test. That would be consistent with a trading range through the balance of this quarter. We see support in the S&P 500 at 1010 and at 8200 for the Dow.
DEFINITIONS OF TREND We've tried in the past couple weeks to distinguish between the different types of trends. We'll explain here how we define those trends. Then, we'll show you the current status of all three with one of our favorite indicators. The short-term trend covers the period shorter than a month - usually the next two weeks. The intermediate trend covers the period over the next one to six months (usually three months). The major trend covers the period longer than year. The charts we use to measure each trend are the monthly (for the major), the weekly (for the intermediate), and the daily (for the short term trend).
MACD CHARTS Chart 4 (see Chart 4) shows MACD lines on the daily S&P 500 chart. The two solid lines along the bottom are exponentially smoothed moving averages, which give trading signals when they cross. The short term trend is positive at the moment. The vertical histogram bars plot the difference between the two lines and are above their zero line, which is also positive. Chart 5 (see Chart 5) shows that the weekly lines are still negative. However, the histogram bars are starting to move upward toward their zero line, which implies a rally within a downtrend. The MACD lines would have to cross to the upside (which would put the histogram above its zero line) to turn the intermediate trend positive. Chart 6 (see Chart 6) shows that the monthly MACD lines are negative. So, the long term trend is negative. The weekly trend is also negative, but improving. The daily trend is positive, but weakening. The improvement in the daily and weekly charts caused us to shift from bearish to neutral for this quarter. However, the fact that the weekly and monthly charts are still negative is keeping us very cautious on our outlook for 1999.
READ FORUM COMMENTS We encourage you read the Forum Commentaries during the week. We use the Forum to update ideas and explore new ones. We view our website as the sum of its parts. Our Forum Commentaries are an integral part of our analysis. If you don't read them, you're missing much of what we're saying. In most instances, you'll read our market ideas much sooner on the Forum than in our weekend updates. Read back over the Forum Commentaries for the past week to review points we missed in our weekend update. We didn't see any point in repeating them here.
11h ANNUAL IFTA CONFERENCE IN ROME I'll be taking this week off to travel to Rome, Italy to address the annual conference of the International Federation of Technical Analysts (IFTA), which is being sponsored by the Italian technical society (Societa italiana de Analisi Tecnica). IFTA is a global organization which includes technical analysts from more than twenty countries. Each year a different country hosts the conference. This year's topic is "Revolutionary Technical Analysis for the New Millennium." I'll be announcing publication of the second edition of "Technical Analysis of the Financial Markets," which is used as the official text for many of the IFTA societies. Since I'll be speaking at that Roman Forum, I won't be doing any updates on our Forum in the coming week. Nor will there be an update next weekend. I will be keeping an eye on things however. As soon as I return on Monday, November 2, I'll use the Forum to catch up on what's happening in the markets. Ciao.
murphymorris.com
Enjoy!
Peggy |
