Technical Market Report
The good news is:
• The number of new lows remains insignificant.
• The secondaries have been outperforming the blue chips.
• Last weeks sell off left the market over sold and ripe for a bounce.
During a longer term upward move there will be sudden sharp declines. As the upward cycle matures prices flatten out then slowly begin to turn downward (tops form slowly while bottoms are usually abrupt). The Russell 2000 (R2K) shown in the chart below looked like it was forming flattening top. There was a high in late January and two failed run ups approaching the January high since then.
The NASDAQ composite, shown below, appears more bearish with what appears to be a well defined pattern of lower highs and lower lows since late January.
I forecasted an up week last week, expecting the market to continue higher for several days before turning downward later in the week.
That interpretation was obviously wrong.
The sharp sell off during the first four trading days of last week, without a significant increase in the number of new lows, is typical of an advancing market not one approaching a top.
The secondaries normally lead both up and down.
The chart below shows the Russell 2000 and the S&P 500 (SPX) with a FastTrack relative strength indicator called Accutrack. Accutrack shows the R2K held up well relative to the SPX in the recent sell off supporting the idea the recent sell off was a decline in an up market.
The decline that ended Thursday was one of the worst since the advance began. The chart below shows the NASDAQ 100 (NDX) with an indicator that shows the percentage of the previous 5 trading days that were up. For the indicator to reach the bottom of the screen there have to be 5 consecutive down days in the index. Last Thursday marked the second time in the past year that there have been 5 consecutive down days in the index, the last time was in late June 2003.
The chart below provides additional evidence of how over sold the market is (especially the technology issues that make up the NDX). The chart, covering the past year and a half, shows the NDX (red) and an indicator of new lows (blue). The indicator, calculated from the component issues of the NDX, is a 10% trend of new lows calculated over the past 6 weeks (rather than 52 weeks as reported by the exchanges). The indicator is plotted on an inverted Y axis so an increasing number of new lows move the indicator downward while a decreasing number of new lows move the indicator upward (up is good and down is bad). As of last Thursday the indictor was at its lowest level in over a year and a half and Friday it turned upward.
If this interpretation is correct, the market should be very near (or already in) a substantial move upward.
I expect the major indices will be higher on Friday March 19 than they were on Friday March 12.