Market Direction Thoughts 6/20/04
Commentary on Previous Reports
My last report was slightly bearish, with emphasis on a bearish divergence between market strength and ORMA. The indices fell for the week, but not as much as I expected. The $SPX was essentially unchanged, while $COMPQ dropped just over half of one percent.
Last week’s sector picks were acceptable. The biotech measures were among the best performers, bouncing as expected. I was positive on $OSX, which netted nearly 6% on the week (some of which went into my own pocket). Energy stocks were, in fact, the best performers of the week. $UDX was a mild disappointment, falling slightly while I expected a resumption of the recent uptrend. Precious metals ($XAU, $HUI) fell sharply on Monday, but stabilized on Tuesday and Wednesday, finally ending up a solid 2%-plus on the week.
Summary of The Week Just Ended
$COMPQ failed to capitalize on the prior week’s penetration of resistance at 2000, but $SPX stayed slightly above the old resistance of 1125. This divergent behavior just adds to the tension that I think will be resolved very soon.
$COMPQ daily ORMA is at 72% and falling. Weekly ORMA is at 48% and rising.
$COMPQ P&F chart remains in X’s and above the bullish support line, so it still looks “safe”:
stockcharts.com[PA][D][F1!3!1.5!!2!20]&pref=G
Daily Bud Oscillator is again indeterminate. Weekly Bud Oscillator is flashing danger signs.
$SPX daily ORMA is at 72% and falling, with weekly ORMA at 49% and rising. Daily Bud oscillator is still in an area where the probability of downside is greater than upside. Weekly Bud oscillator is flashing red, indicating that downside is probable.
P&F chart is still in X’s and on a buy signal:
stockcharts.com[PA][D][F1!3!1.5!!2!20]&pref=G
The highs established during the prior week held for both $COMPQ and $SPX. Those highs are not formidable, especially considering that Market Strength indicator rose for most of the entire week, and finished at levels higher than it reached at the recent index price highs.
Commentary and Outlook:
Without shame I’ll be very unoriginal here and state that the markets have been postponing a decision for overlong. I believe that this week will finally resolve this uncertainty.
Both Market Strength and Market Weakness indicators rose for the week, with Market Weakness reversing a very brief downtrend on Friday. Market Strength is, unlike last week, slightly supportive of market attempts to break through resistance levels, but Market Weakness put in a higher low, making me concerned about market failure in the next few days. Once again, there is dissension among the indicators.
One of my useful chart systems looks for synchronization between daily ORMA and Market Strength/Weakness. These indicators were synchronized to a bearish view at the beginning of this month, but the indices have not buckled. Does this mean that there will be a delayed reaction? Or does this mean that the signal has failed? I am unclear at this time, but this gives my current bearish bias cause for concern.
The three commentators to whom I pay the closest attention are either bullish or neutral with a bullish bias. Their timeframes are generally longer than what I am able to attempt with my indicators, so I can be short-term modestly bearish without being terribly inconsistent with their prognostications.
$COMPQ has modest support at 1960 and stronger support at 1875, with resistance at 2025, 2050-2060, and again at 2075. $SPX has support at 1115 and again at 1076-1080, with stair-step resistance from 1140 up to 1160. Beyond that, there is very strong resistance at 1175 going back to December of 2001, so blue-sky breakout isn’t in the cards.
Precious metals have long-term trend support at the May lows, so have a good shot at holding that level, but I think we’ll see backing and filling before these stocks head higher.
$XOI and $XNG had significant breakouts during the week, but weekly Bud oscillator advertises a pause for $XNG, while $XOI is in reversal territory, without actually having signaled a reversal. $OSX weekly ORMA chart looks very solid, though the daily chart makes one think that the index has a scheduled date with a gap. In other words, energy-related securities can generally be bought on weakness, with some hesitation about natural gas producers (this is a technical, not a fundamental opinion).
Asian stocks have been underperforming, and now have significant overhead resistance, so funds should not be added to this sector.
P&F BP’s
$BPINDU is in Bear Confirmed status and looks quite ill:
stockcharts.com[PA][D][F1!3!!!2!20]&pref=G
$BPNDX is in Bull Alert status:
stockcharts.com[PA][D][F1!3!!!2!20]&pref=G
VIX
- Daily: ORMA remains oversold (market overbought), but weak, which would allow the market to rise. Bud Oscillator looks for the VIX to rise from here. This combination is slightly bearish.
- Weekly: ORMA oscillator continues to decline, and can easily decline further (meaning market can rise). Weekly view of the Bud oscillator has now telegraphed a reversal, which means that the markets head down from here, possibly with some churning before things get painful. This combination is in conflict, but with somewhat more bearish potential than bullish.
Covered call writing could become very dicey, as significant action can occur in either direction.
Promising/dismal sectors:
$BTK and BBH had their bounce, but I would continue to use caution here. Weekly ORMA and Bud oscillator are positive. I think that the weakness will be short-lived, but any bounce must have confirmation.
$OSX may pause in its uptrend, but should be bought on weakness. All energy sectors look very good on weekly ORMA charts.
$UDX will, I believe, retest at 88 before making a decision (which I expect to be higher).
Most tech stock indices, with the exception of biotech ($BTK, BBH) look very risky on the weekly Bud oscillator, while other major indices such as $SPX and $DJX and $MID don’t look much better. RKH and RTH are reasonable short candidates at this time. Weekly ORMA indicators for most indices don’t offer additional insight at this time.
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. |
