Technical Market Report for June 18, 2011

By: Mike Burk | Sat, Jun 18, 2011
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The good news is:
• We have reached the point, in the build up of new lows, where a bottom should be easy to identify.


The negatives

New lows have been building, new highs have been declining and the secondaries have been underperforming the blue chips.

The chart below covers the past 6 months showing the NASDAQ composite (OTC) in blue and a 10% trend (19 day EMA) of NASDAQ new highs (OTC NH) in green. Dashed vertical lines have been drawn on the 1st trading day of each month.

OTC NH has been falling since mid January and is at its lowest point in nearly a year.

New lows are beyond critical levels and increasing.

A rule of thumb about new lows says if NYSE new lows hold above 40 and/or NASDAQ new lows hold above 70 for more than a few days, caution is advised. Those criteria have been in place for several weeks.

The chart below covers the past 6 months showing the OTC in blue and a 10% trend of NASDAQ new lows (OTC NL) in black. OTC NL has been plotted on an inverted Y axis so decreasing new lows move the indicator upward (up is good).

This decline will be over then OTC NL begins moving sharply upward.

The next chart covers the past 6 months showing the S&P 500 (SPX) in red and a 40% trend (4 day EMA) of the ratio of NYSE new highs to (new highs + new lows) NY HL Ratio in black. Dashed horizontal lines have been drawn at 10% levels for the indicator, the line is solid at the neutral 50% level.

The next chart is similar to the one above except it covers the past 3 years. NY HL Ratio is as low as it has been since the rally began over 2 years ago.

The market will be very risky until new highs begin expanding and new lows diminish quickly.


The positives

The positives all come under the heading of "It cannot get much worse than this."

The chart below covers the past 2 years showing the SPX in red and the percentage of the component issues of the SPX that are above their 21 day EMA in olive drab.

This indicator improved a bit last week and remains at levels from which significant rallies have started.


Seasonality

Next week includes the 5 trading days prior to the 4th Friday of June during the 3rd year of the Presidential Cycle.

The tables below show the return on a percentage basis for the 5 trading days prior to the 4th Friday of June during the 3rd year of the Presidential Cycle. OTC data covers the period from 1963 - 2010 and SPX data covers the period from 1953 - 2010. There are summaries for both the 3rd year of the Presidential Cycle and all years combined. Prior to 1953 the market traded 6 days a week so that data has been ignored.

Average returns over all periods have been slightly negative.

During the 3rd year of the Presidential Cycle, the coming week has not been up since 1995.

Report for the week before the 4th Friday of June.
The number following the year is the position in the Presidential Cycle.
Daily returns from Monday through the 4th Friday.

OTC Presidential Year 3
Year Mon Tue Wed Thur Fri Totals
1963-3 0.41% 0.20% -0.41% -0.79% -0.35% -0.94%
1967-3 1.04% 0.01% 0.33% -0.58% 0.24% 1.03%
 
1971-3 -1.53% -0.95% 0.47% 0.36% 0.18% -1.47%
1975-3 0.62% 0.54% 0.08% 0.17% 0.06% 1.47%
1979-3 -0.29% 0.15% 0.29% 0.19% 0.39% 0.73%
1983-3 -0.45% 0.41% 0.68% -0.26% 0.48% 0.86%
1987-3 0.04% -0.30% -0.17% -0.01% -0.12% -0.56%
Avg -0.32% -0.03% 0.27% 0.09% 0.20% 0.21%
 
1991-3 -2.18% -0.41% -0.05% 0.67% -0.07% -2.03%
1995-3 1.48% 0.84% -0.07% 1.17% -0.13% 3.29%
1999-3 2.61% -1.90% 0.69% -1.70% -0.05% -0.35%
2003-3 -2.07% -0.32% -0.18% 1.96% -0.54% -1.15%
2007-3 0.00% 0.01% -1.02% 0.65% -1.07% -1.43%
Avg -0.03% -0.36% -0.13% 0.55% -0.37% -0.33%
 
OTC summary for Presidential Year 3 1963 - 2007
Avg -0.03% -0.14% 0.05% 0.15% -0.08% -0.05%
Win% 50% 58% 50% 58% 42% 42%
 
OTC summary for all years 1963 - 2010
Avg -0.19% -0.01% 0.12% -0.08% -0.10% -0.25%
Win% 38% 60% 52% 60% 53% 49%
 
SPX Presidential Year 3
Year Mon Tue Wed Thur Fri Totals
1955-3 0.10% 0.92% 0.22% 0.37% 0.52% 2.13%
1959-3 0.00% -0.02% 0.51% 0.03% 0.96% 1.48%
1963-3 -0.07% -0.23% -0.90% -0.49% 0.43% -1.25%
1967-3 -0.03% -0.03% -0.30% -0.25% 0.03% -0.58%
 
1971-3 -1.11% -0.29% 0.84% -0.24% -0.18% -0.98%
1975-3 1.09% 0.61% 0.46% 0.20% 0.00% 2.36%
1979-3 -0.52% 0.02% 0.05% 0.45% 0.54% 0.54%
1983-3 -0.07% 0.89% 0.27% -0.25% -0.10% 0.75%
1987-3 0.87% -0.39% -0.51% 0.68% -0.58% 0.07%
Avg 0.05% 0.17% 0.22% 0.17% -0.08% 0.55%
 
1991-3 -1.80% -0.08% 0.25% 0.76% -0.87% -1.74%
1995-3 1.00% -0.04% -0.18% 1.30% -0.25% 1.83%
1999-3 0.45% -0.97% -0.21% -1.30% -0.04% -2.06%
2003-3 -1.31% 0.18% -0.83% 1.08% -0.97% -1.85%
2007-3 -0.12% 0.17% -1.36% 0.62% -1.29% -1.98%
Avg -0.36% -0.15% -0.47% 0.49% -0.68% -1.16%
 
SPX summary for Presidential Year 3 1955 - 2007
Avg -0.12% 0.05% -0.12% 0.21% -0.14% -0.09%
Win% 38% 43% 50% 64% 38% 50%
 
SPX summary for all years 1953 - 2010
Avg -0.22% 0.10% 0.05% -0.05% -0.14% -0.24%
Win% 38% 54% 54% 53% 44% 53%


Money supply (M2)

The money supply chart was provided by Gordon Harms. M2 growth has been holding above trend.

M2 Money Supply


Conclusion

The market is still oversold, but, seasonality for next week is weak.

There are no sighs of a bottom. I expect the major averages to be lower on Friday June 24 than they were on Friday June 17.

Last week most of the major indices were up, but the OTC was down so I am calling last weeks positive forecast a tie.

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Thank you,

 


 

Author: Mike Burk

Mike Burk

Mike Burk independently publishes a weekly newsletter on the stock market from a technical perspective.

Charts and figures presented herein are believed to be reliable but we cannot attest to their accuracy. Recent (last 10-15 yrs.) data has been supplied by CSI (csidata.com), FastTrack (fasttrack.net), Quotes Plus (qp2.com) and the Wall Street Journal (wsj.com). Historical data is from Barron's and ISI price books. The views expressed are provided for information purposes only and should not be construed in any way as investment advice. Furthermore, the opinions expressed may change without notice.

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