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Technical Market Report for November 20, 2010

The good news is:
• Following a serious tumble last Tuesday the market managed to finish up for the week.


The negatives

When the market is surging new highs expand even while the indices are falling. That is not happening now.

The chart below is an update of one I showed last week covering the past year 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 continued to fall last week in spite of the week ending with a 3 day rally. The value of the indicator is 117 so any rally that generates less than 117 NASDAQ new highs should be regarded with suspicion.

NASDAQ and NASDAQ NH

The chart below is similar to the one above except is shows the S&P 500 (SPX) in red and NY NH has been calculated from NYSE new highs.

The pattern is similar. The value of NY NH is 153 so more than 153 NYSE new highs will be required to turn NY NH upward.

SPX and NYSE NH

New lows have not reached threatening levels, but they are going in the wrong direction.

The chart below covers the past year 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).

OTC NL has been trending downward for the past month.

There is a long standing rule of thumb that there is little to worry about until NASDAQ new lows exceed 70 for several days and so far that has not happened.

NASDAQ and NASDAQ NL

The chart below is similar to the one above except it shows the SPX in red and NY NL has been calculated from NYSE data.

The pattern is similar except NY NL turned up at the end of last week.

The rule of thumb worry point for NYSE new lows is 40. There were 48 NYSE new lows on Monday and 139 on Tuesday after that they declined sharply turning NY NL upward.

SPX and NYSE NL


The positives

The chart below is an update of one I have been showing every week, it covers the past year showing the OTC in blue and a 40% trend (4 day EMA) of the ratio of NASDAQ new highs to new highs + new lows (OTC HL Ratio) in red. Dashed horizontal lines have been drawn at 10% levels of the indicator; the line is solid at the neutral 50% level.

The indicator fell to 51% on Wednesday before recovering to 60% on Friday; still marginally positive.

NASDAQ and NASDAQ HL Ratio

The next chart is similar to the one above except is shows the SPX in red and NY HL Ratio has been calculated from NYSE data.

NY HL Ratio fell to 48% on Wednesday before recovering to 71% on Friday.

SPX and NYSE HL Ratio

NY HL Ratio has a positive bias relative to OTC HL Ratio so 60% - 65% should probably be considered the neutral point. Still both are marginally positive.


Seasonality

Next week includes Thanksgiving week during the 2nd year of the Presidential Cycle.

The tables below show the return on a percentage basis for Thanksgiving week during the 2nd year of the Presidential Cycle. OTC data covers the period from 1963 - 2009 and SPX data from 1953 - 2009. Prior to 1953 the market traded 6 days a week so that data is been ignored. There are summaries for both the 2nd year of the Presidential Cycle and all years combined.

Average returns have been positive by all measures.

3 days before Thanksgiving and 1 day after. Day1 = the day after
The number following the year represents its position in the presidential cycle.
The number following the daily return represents the day of the week;
1 = Monday, 2 = Tuesday etc.

OTC Thanksgiving week Presidential Year 2
  Day4 Day3 Day2 Day1 Totals
1966-2 -0.31% 1 -1.00% 2 -0.42% 3 0.18% 5 -1.54%
 
1970-2 0.47% 1 0.28% 2 0.31% 3 0.25% 5 1.32%
1974-2 -0.63% 1 1.57% 2 0.24% 3 0.24% 5 1.42%
1978-2 0.72% 1 0.04% 2 0.71% 3 0.69% 5 2.17%
1982-2 -1.58% 1 -0.27% 2 0.76% 3 0.78% 5 -0.32%
1986-2 0.41% 1 0.24% 2 0.34% 3 0.40% 5 1.38%
Avg -0.12% 0.37% 0.47% 0.47% 1.19%
 
1990-2 0.54% 1 -1.26% 2 0.14% 3 0.08% 5 -0.51%
1994-2 -0.91% 1 -2.18% 2 -0.61% 3 0.79% 5 -2.91%
1998-2 2.57% 1 -0.58% 2 0.88% 3 1.65% 5 4.52%
2002-2 0.90% 1 -2.53% 2 3.01% 3 -0.62% 5 0.76%
2006-2 0.28% 1 0.09% 2 0.45% 3 -0.23% 5 0.59%
Avg 0.68% -1.29% 0.78% 0.33% 0.49%
 
OTC summary for Thanksgiving week Presidential Year 2 1966 - 2006
Averages 0.22% -0.51% 0.53% 0.38% 0.63%
%Winners 64% 45% 82% 82% 64%
MDD 11/23/1994 3.66% -- 11/26/2002 2.53% -- 11/23/1982 1.85%
 
OTC summary for Thanksgiving week over all years 1963 - 2009
Averages -0.08% -0.19% 0.37% 0.50% 0.60%
%Winners 47% 52% 77% 83% 64%
 
SPX Thanksgiving week Presidential Year 2
  Day4 Day3 Day2 Day1 Totals
1954-2 0.39% 1 1.34% 2 0.56% 3 0.96% 5 3.25%
1958-2 -2.60% 1 -0.60% 2 1.72% 3 1.12% 5 -0.36%
1962-2 -0.57% 1 1.05% 2 0.60% 3 1.20% 5 2.28%
1966-2 -1.44% 1 -0.52% 2 0.68% 3 0.80% 5 -0.49%
 
1970-2 0.62% 1 0.64% 2 0.37% 3 0.99% 5 2.61%
1974-2 -0.10% 1 0.93% 2 0.68% 3 0.04% 5 1.55%
1978-2 0.88% 1 -0.25% 2 0.49% 3 0.32% 5 1.45%
1982-2 -2.04% 1 -0.96% 2 0.71% 3 0.75% 5 -1.54%
1986-2 0.65% 1 0.29% 2 0.24% 3 0.18% 5 1.36%
Avg 0.00% 0.13% 0.50% 0.46% 1.09%
 
1990-2 0.70% 1 -1.26% 2 0.23% 3 -0.29% 5 -0.63%
1994-2 -0.69% 1 -1.79% 2 -0.03% 3 0.52% 5 -1.99%
1998-2 2.12% 1 -0.44% 2 0.33% 3 0.45% 5 2.47%
2002-2 0.25% 1 -2.10% 2 2.80% 3 -0.27% 5 0.68%
2006-2 -0.05% 1 0.16% 2 0.23% 3 -0.37% 5 -0.02%
Avg 0.47% -1.08% 0.71% 0.01% 0.10%
 
SPX summary for Thanksgiving week Presidential Year 2 1954 - 2006
Averages -0.13% -0.25% 0.69% 0.46% 0.76%
%Winners 50% 43% 93% 79% 57%
MDD 11/25/1958 3.19% -- 11/23/1982 2.98% -- 11/23/1994 2.50%
 
SPX summary for Thanksgiving week for all years 1953 - 2009
Averages -0.12% 0.12% 0.38% 0.39% 0.78%
%Winners 45% 60% 79% 78% 69%


Money supply (M2)

The chart below was provided by Gordon Harms. Money supply growth has been modestly positive.

M2 Money Supply


Conclusion

On average Thanksgiving week begins weak and ends strong on very low volume. We have an ideal setup for an average week. Last week ended with 3 consecutive up days so the market is a little overbought. Monday and Tuesday could easily be down working off the overbought condition setting up for a seasonal rally Wednesday and Friday.

I expect the major averages to be higher on Friday November 26 than they were on Friday November 19.

Last weeks negative forecast was a miss.

This report is free to anyone who wants it, so please tell your friends. They can sign up at: http://alphaim.net/signup.html. If it is not for you, reply with REMOVE in the subject line.

In his latest newsletter, Jerry Minton looks at the forces which will shape investments for the next ten years. You can read about it and sign up for his free newsletter at www.alphaim.net.

Thank you,

 

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