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Technical Market Report

The good news is:
 •  Next week has a positive seasonal bias.
 •  The number of new lows remains insignificant.

Watching the market day to day and week to week can be bewildering. Between January 26 and February 24 the NASDAQ composite declined nearly 7% and a WSJ headline told us the NASDAQ had gone nowhere for the year so far and I pointed out that many of the short term indicators were at or near their lowest point since the rally began nearly a year ago.

The chart below shows the ratio of new highs to new highs + new lows for the past 6 months.

The indicator does a pretty good job of smoothing out short term moves. In January, the period between the red dashed vertical line and the next black dashed vertical line to its right (Feb 1) the indicator wiggled up and down a little but stayed very high indicating that at least in the short term the market was ok.

A longer term view suggests that even the worst that we have seen in this rally so far has been nothing but a wiggle near the top of the chart. If your perspective is much longer than a week, there has been nothing technically alarming since this rally began.

The chart below shows the same indicator as the above chart, but the period covered is 18 months. As you can see in the past 11 months even the lowest levels reached by the indicator have been higher than the highest levels reached before that.

This explanation was prompted by a note I received from a subscriber, Jimmy Hixson, who pointed out that on some indicators levels do matter.

The longer term perspective is the most important and I cover it in the opening lines of this report. The problem with the longer term perspective is that it doesn't change very often and it has been the same old story for nearly a year now and remains unchanged.

Short term forecasting is more fun.

Next week has a lot going for it. The low of a week ago was not confirmed by many indicators and the chart below is a good example. It shows the NASDAQ composite with an oscillator of up and down volume. The indicator is constructed by subtracting a 5% trend (39 day EMA) form a 10% trend (19 day EMA) of NASDAQ advancing volume-declining volume. At the price low of a week ago, the indicator was higher than it was at its previous low a couple weeks earlier (classical non-confirmation).

Putting a momentum indicator on an oscillator can make it easier to read because the momentum indicator forces a nearly binary pattern on the oscillator. This technique is used to identify cycles. The chart below applies this type of calculation to the NASDAQ advance-decline line. Earlier this month a cycle was cut short. The last time that happened was back in September and I have marked both with an X. After the second low in September the market had a good two week run. We came off a similar pattern a week ago.

Seasonality should help next week. As you can see in the tables below, the first 5 trading days of March have been pretty strong and typical of seasonally strong periods, the secondaries have outperformed.

First 5 days of March.
The number following the daily return represents the day of the week;
1 = Monday, 2 = Tuesday etc.
The Number following the year is its position in the presidential cycle.

Russell 2000
R2K Day1 Day2 Day3 Day4 Day5 Totals
1989-1 0.07% 3 0.65% 4 0.41% 5 0.59% 1 0.18% 2 1.91%
1990-2 0.20% 4 0.73% 5 0.06% 1 0.69% 2 0.31% 3 2.00%
1991-3 0.77% 5 1.39% 1 2.01% 2 0.15% 3 0.38% 4 4.70%
1992-4 0.30% 1 0.14% 2 -0.39% 3 -1.22% 4 -0.69% 5 -1.86
1993-1 -1.26% 1 2.05% 2 0.71% 3 -0.04% 4 0.27% 5 1.73%
1994-2 -0.45% 2 -0.58% 3 0.13% 4 0.59% 5 0.75% 1 0.44%
1995-3 -0.20% 3 0.04% 4 0.29% 5 -0.43% 1 -0.65% 2 -0.95%
1996-4 -0.26% 5 0.45% 1 0.40% 2 0.08% 3 0.09% 4 0.77
1997-1 0.12% 1 0.39% 2 0.56% 3 -0.04% 4 0.46% 5 1.49%
1998-2 -0.06% 1 0.19% 2 -0.06% 3 -1.15% 4 1.51% 5 0.43%
1999-3 0.54% 1 0.01% 2 -0.63% 3 0.53% 4 1.01% 5 1.47%
2000-4 1.84% 3 -0.73% 4 2.37% 5 0.63% 1 -1.02% 2 3.08
2001-1 -0.23% 4 0.76% 5 -0.23% 1 1.12% 2 0.77% 3 2.20%
2002-2 1.92% 5 2.02% 1 -0.09% 2 1.48% 3 0.02% 4 5.35%
2003-3 -0.34% 1 -0.78% 2 0.01% 3 -0.76% 4 0.10% 5 -1.77%
Averages 0.20% 0.45% 0.37% 0.15% 0.23% 1.40%
% Winners 53% 80% 67% 60% 80%  
 
S&P 500
SPX Day1 Day2 Day3 Day4 Day5 Totals
1989-1 -0.61% 3 0.99% 4 0.42% 5 1.25% 1 -0.32% 2 1.74%
1990-2 0.26% 4 0.84% 5 -0.54% 1 1.26% 2 -0.29% 3 1.53%
1991-3 0.93% 5 -0.31% 1 2.00% 2 -0.15% 3 -0.07% 4 2.40%
1992-4 -0.06% 1 0.10% 2 -0.85% 3 -0.69% 4 -0.51% 5 -2.01
1993-1 -0.31% 1 1.33% 2 0.30% 3 -0.43% 4 -0.27% 5 0.62%
1994-2 -0.58% 2 0.08% 3 -0.39% 4 0.37% 5 0.47% 1 -0.05%
1995-3 -0.36% 3 -0.11% 4 0.06% 5 0.05% 1 -0.73% 2 -1.08%
1996-4 0.62% 5 1.00% 1 0.77% 2 -0.58% 3 0.25% 4 2.05
1997-1 0.57% 1 -0.55% 2 1.40% 3 -0.43% 4 0.80% 5 1.79%
1998-2 -0.16% 1 0.41% 2 -0.45% 3 -1.17% 4 1.99% 5 0.63%
1999-3 -0.18% 1 -0.86% 2 0.18% 3 1.54% 4 2.31% 5 3.00%
2000-4 0.93% 3 0.19% 4 1.98% 5 -1.27% 1 -2.56% 2 -0.73
2001-1 0.10% 4 -0.57% 5 0.59% 1 1.00% 2 0.65% 3 1.77%
2002-2 2.26% 5 1.95% 1 -0.67% 2 1.45% 3 -0.45% 4 4.55%
2003-3 -0.75% 1 -1.54% 2 0.96% 3 -0.93% 4 0.83% 5 -1.44%
Averages 0.18% 0.20% 0.38% 0.08% 0.14% 0.98%
Winners 47% 60% 67% 47% 47%  

The market got the script right last week. Monday, the day following options expiration, was weak and the rest of the week had a mild upward bias.

Next week should be similar. After 4 consecutive up days the market is due for a down day. This week should be stronger than last week because there are indications we have come off a short term cycle low and the seasonal bias is stronger

I expect the major indices will be higher on Friday March 5 than they were on Friday February 27.

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