Market Direction Thoughts 5/30/04
Commentary on Previous Reports
My last report was fairly neutral in its overall tone, with a number of hopeful signals balanced by some serious bearish considerations. $SPX rose nearly 3% during the week, and $COMPQ rose nearly 4%, so this is a move that one is sorry to miss. One of my comments seems worth repeating: “Note that $NDX and QQQ did NOT break the March lows, and I think that this is significant.” I also noted that $COMPQ weekly ORMA could put in a notable double bottom if we rose. The double bottom hasn’t yet been confirmed, but it seems to be only a matter of time before it is.
What were the bearish tones that I observed last week, and where do they stand now? BPCOMPQ was falling from a very high level, which was and is still a heavy weight around any analysis. Market Weakness indicator had just reversed up at the writing of the previous report. Last Monday it reversed downward in a rare display of fickleness. Today it is extremely low (meaning that the bears lack conviction), but it’s good twin, Market Strength, just reversed downward from fairly low levels. This gives pause to any highly bullish analysis.
The VIX readings again carried the day, though I don’t think I would have guessed at such a strong weekly performance even if I had been decidedly bullish.
My sector calls finally had a genuinely good showing. I gave thumbs down to PPH and $DRG, and continued to be bearish on $UDX and $TYX. These four metrics were at the bottom of the barrel in terms of percentage gain for the week. I was positive on internet and semiconductor sectors, and these were among the top performers. I was also positive on IAH, which came in below average, and $XAL, which was one of the poorest performers.
Summary of The Week Just Ended
$COMPQ rose each day for the entire week, while $SPX went four out of five. Tuesday was a banner day for the bulls. No important support or resistance levels were taken out, though both indices finished near notable resistance of 2000 for $COMPQ and 1125 for $SPX. $COMPQ now has reasonable support at 1875, and $SPX at 1080.
$COMPQ daily ORMA is at 78% and rising, having gone from oversold to overbought during the week. Weekly ORMA is at 13% and falling, remaining very oversold, but clearly ready to reverse upward. Weekly ORMA is still above its March bounce point.
$COMPQ P&F chart reversed into X’s, having broken a double bottom by one box, and remains above the bullish support line:
stockcharts.com[PA][D][F1!3!1.5!!2!20]&pref=G
Daily Bud Oscillator shows that we are overbought and about to decline. Weekly Bud Oscillator forecasts continued upside from here.
$SPX daily ORMA is at 78% and rising, with weekly ORMA at 38% and rising. Daily Bud oscillator points to imminent downside. Weekly Bud oscillator calls for continued upside.
P&F chart is unchanged from last week, still in O’s and still on a buy signal:
stockcharts.com[PA][D][F1!3!1.5!!2!20]&pref=G
Commentary and Outlook:
Market weakness indicator is at extremely low levels, meaning that the bears lack conviction. Market Strength is at moderate levels but just reversed downward.
The $SPX support at 1076 – 1080 became somewhat more convincing, but the index has no meaningful support below that level until 960. Resistance is at 1125, and again at 1150 and 1160. $COMPQ has strengthened support in the 1875 area, still has support at 1850 from October, and then has declining stairstep support below that. Resistance is at 2000, 2050, and 2075. Market strength is higher now than it was when $SPX flirted with 1120 (and failed) in mid-March and early May, but lower than it was in late March when $SPX broke above 1120.
Precious metals continued to perform well, and even broke some substantial resistance ($XAU 88-ish), but this break looks like a bull-trap on the daily charts and too-much-too-fast on the weekly charts.
Energy-related sectors look good for breakouts over the near term.
Asian stocks have probably risen too fast of late, so I would defer new purchases until after a pullback occurs.
P&F BP’s
$BPINDU is in O’s and still on its way down. Of all indicators this probably carries the heaviest weight toward mid-term bearishness:
stockcharts.com[PA][D][F1!3!2.0!!2!20]&pref=G
VIX
- Daily: ORMA is still falling but has reached oversold (market overbought) levels, raising some fears about a decline. Bud Oscillator is now market bearish, but similar patterns in the past have typically led to brief declines followed occasionally by trendlessness, but more often by market rises.
- Weekly: ORMA oscillator is at 72% and rising, leading me to conclude that there is minimal downside risk. Weekly view of the Bud oscillator confirms that last week’s rise has legs.
My primary reasons for bearishness include the $BPINDU (see above), the weak Market Strength readings combined with high daily ORMA, daily VIX readings, and $COMPQ proximity to strong resistance at 2000.
The bullish camp has weekly ORMA and Bud Oscillator for many sector charts on its side, as well as weekly VIX readings. It is not at all unusual for daily charts to reach overbought levels and continue rising when a weekly-chart reverses up from low levels. That’s what I’ll be watching for right here. The kidnappings/murders in Saudi Arabia may be quickly forgotten, so I think that short positions (that you plan to hold for weeks) aren’t advisable at this time.
I’d like to see $SPX fall to 1090-1100 and then reverse upwards. If Tuesday and Wednesday have any reasonable levels of fear in them then this could happen. Bears should look for $SPX 1070, or weakness at 1120-1130, before thinking that they have the odds in their favor. I'm looking to add to positions in a Tuesday or Wednesday drop. This means probably closing out my USPIX position taken last week.
I truly don’t know what the market will do in response to Al-Qaeda’s Khobar activities, and I haven’t made much effort to fit those actions into my expectations.
Promising/dismal sectors:
Quite a few sectors look very promising on both the ORMA and Bud Oscillator weekly charts. $BTK, HHH, $SOX, $NDX, SWH, WMH, and $XCI are among the best-looking charts. $TYX and $UDX can expect more downside.
Definitions
ORMA – A home-grown oscillator. It’s similar to %D of a 14, 3, 5 stochastic indicator. It’s more responsive than predictive, faster than %D yet with fewer false signals.
Bud oscillator – A home-brewed oscillator that often has some predictive value.
Market Strength/Bull Strength – A measure of bullish influence in the market, akin to new highs.
Market Weakness/Bear Strength – A measure of bearish influence in the market, akin to new lows. Usually, but not always, moves inversely to Market Strength.
Short Term: a few days or a week.
Medium Term: several weeks.
Long Term: several months.
Disclaimer
Everything here is my own opinion only, and it’s worth what you paid for it. I’ve been known to be wrong at times. And I’ve been known to be right at least half as often as I’ve been wrong, though I haven’t kept records to support that statement. |
