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Technical Market Report

The good news is the NYSE advance-decline line hit a new cycle high on Friday. The implications of that is there should be additional highs in the blue chip indices in the next 2-6 weeks.

The bad news is my forecast for last week missed. Here goes with a postmortem:
An assumption in my recent forecasts has been a continuation of the recent cyclical pattern which has lasted about one month bottom to bottom. The cycle that ended the week before Thanksgiving lasted 18 trading days and the one before that 19 trading days. If the low we saw on Wednesday was the cycle bottom, that cycle lasted just 13 trading days.

Last week the DJIA and S&P 500 (SPX) hit new cycle highs, but the NASDAQ composite (OTC) and the Russell 2000 (R2K) did not. Blue chips outperforming the secondaries is a pattern indicative of developing tops.

Cyclic patterns can be traced out by any number of technical indicators. My preference is to apply a momentum indicator to Moving Average Convergence Divergence (MACD) itself a momentum indicator. Applying a momentum indicator to MACD produces a nearly binary indicator that marks cycle tops and bottoms.

The following two charts show the cycle indicator applied to first the R2K then the DJIA.

On Wednesday the R2K bottomed at its tend line and headed upward Thursday and Friday.

The DJIA shown below continued upward extending its cycle top, hitting its upper trend line and putting it out of synch with the R2K.

Until last week, these cycle patterns have been nearly identical.

Look back to mid November and you can see a strong rally that lasted 2 days for the R2K and 1 day for the DJIA and brought both indices close to their previous highs.

In the chart below I have circled area I am referring to and drawn an arrow to the indicator. The indicator is Net Field Trend (NFT) which is the percentage of issues in the index with negative trends subtracted from the percentage of issues in the index with positive trends. The trend is positive if the issues On Balance Volume (OBV) has two progressively higher highs and two lower lows and it is negative if its OBV has two progressively lower highs and two lower lows. OBV is calculated by adding the volume of the issue on days that is up from a running total and subtracting it when it is down. The index is the SPX.

NFT rose slightly in mid November when the index rallied, this time the indicator continued downward while the index hit a new cycle high. This pattern is similar with many indicators on many indices.

The next chart is a FastTrack chart showing the R2K, SPX and Accutrack a FastTrack relative strength indicator. The indicator was declining in mid November and stalled for a couple days. This time it appears to have turned up slightly and could be indicating a bottom or it could be a stall like we saw in November.

The secondaries have been under performing the blue chips since the first of the month and the blue chips have extended their recent cyclical pattern on the upside. I do not think the blue chips will extend their cycle for more than a day or two longer and when they begin declining the secondaries will continue their under performance.

I expect the major indices to be lower on Friday December 19 than they were on Friday December 12.

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