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Technical Market Report for March 19, 2011

The good news is:
• New lows appear to have peaked last Tuesday.


The negatives

Volume has been a problem since this rally began. Last Wednesday the ratio of upside volume to downside volume was 10 to 1 negative; hopefully a climax.

The chart below shows an extreme example. It covers the past 6 months showing the S&P 500 in red and a 5% trend (39 day EMA) of NYSE upside volume (NY UV) in green. Dashed vertical lines have been drawn on the 1st trading day of each month.

NY UV hit a low for the period shown last Wednesday the recovered sharply. Last Wednesday's low was the lowest level in nearly 10 years.

Downside volume abruptly dries up at a bottom and we have not seen that yet.

The chart below covers the past 6 months showing the SPX in red and a 5% trend (39 day EMA) of NYSE downside volume (NY DV) in brown. NY DV has been plotted on an inverted Y axis so decreasing downside volume moves the indicator upward (up is good).

NY DV recovered a little on Thursday and Friday, but not enough to be convincing.

The next chart is similar to the one above except is shows the NASDAQ composite (OTC) in blue and OTC DV has been calculated from NASDAQ data. The pattern is similar.


The positives

New lows appear to have peaked on Tuesday at 77 on the NYSE and 134 on the NASDAQ and although Wednesday was down for all of the major indices new lows declined. Thursday and Friday were up days and new lows declined as you would expect. The next down day will be a test. If new lows decline on a down day this rough patch is probably over.

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).

OTC NL turned up on Friday, but at this point the move cannot be called any more than a wiggle. The value of the indicator is 53 so anything less than 53 new lows will move the indicator upward.

The next chart is similar to the one above except it shows the SPX in red and NY NL has been calculated from NYSE data. The value of NY NL is 25 so anything less than 25 NYSE new lows will move that indicator upward.

New lows are critical. You can see on the charts above that the market is pretty safe when the new low indicators are moving upward.


Seasonality

Next week includes the 5 trading days prior to the 4th Friday of March 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 March during the 3rd year of the Presidential Cycle. OTC data covers the period from 1963 - 2010 and SPX data from 1953 - 2010. Prior to 1953 the market traded 6 days a week so that data has been ignored. There are summaries for both the 3rd year of the Presidential Cycle and all years combined.

Average returns have been modest by all measures, but a little better during the 3rd year of the Presidential Cycle.

Report for the week before the 4th Friday of March.
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 0.39% -0.29% -0.13% 0.35% 0.06% 0.39%
1967-3 0.66% 0.16% 0.69% 0.20% 0.32% 2.04%
 
1971-3 -0.38% -0.25% -0.39% -0.10% 0.45% -0.66%
1975-3 0.00% 0.00% 0.00% 0.00% 0.00% 0.00%
1979-3 0.46% -0.27% 0.50% 0.49% 0.38% 1.57%
1983-3 0.50% 0.45% 0.65% 0.41% 0.19% 2.20%
1987-3 -0.36% 0.02% -0.15% 0.28% -0.42% -0.63%
Avg 0.05% -0.01% 0.15% 0.27% 0.15% 0.62%
 
1991-3 0.00% -0.74% 0.71% -0.32% -0.10% -0.45%
1995-3 0.27% -0.09% -0.08% 0.28% 0.90% 1.27%
1999-3 -1.06% -3.05% 1.83% 2.94% -0.64% 0.02%
2003-3 -3.66% 1.55% -0.26% -0.23% -1.06% -3.66%
2007-3 0.92% 0.58% 1.98% -0.17% -0.11% 3.19%
Avg -0.71% -0.35% 0.84% 0.50% -0.20% 0.07%
 
OTC summary for Presidential Year 3 1963 - 2007
Avg -0.21% -0.18% 0.49% 0.38% 0.00% 0.48%
Win% 55% 45% 55% 64% 55% 64%
 
OTC summary for all years 1963 - 2010
Avg -0.01% -0.21% 0.15% 0.21% 0.01% 0.14%
Win% 51% 44% 51% 59% 49% 59%
 
SPX Presidential Year 3
Year Mon Tue Wed Thur Fri Totals
1955-3 -0.64% 0.61% 1.30% 0.79% 0.08% 2.15%
1959-3 0.00% 0.00% 0.00% 0.00% 0.00% 0.00%
1963-3 -0.49% -0.21% 0.73% -0.15% 0.52% 0.40%
1967-3 -0.08% 0.04% -0.20% -0.03% -0.55% -0.82%
 
1971-3 -0.39% -0.34% -0.66% -0.01% 0.34% -1.05%
1975-3 0.00% 0.00% 0.00% 0.00% 0.00% 0.00%
1979-3 0.37% -0.55% 0.75% 0.41% -0.07% 0.91%
1983-3 0.86% -0.35% 1.43% 0.37% -0.46% 1.85%
1987-3 1.00% 0.16% -0.42% 0.18% -1.60% -0.67%
Avg 0.46% -0.27% 0.27% 0.24% -0.44% 0.26%
 
1991-3 -0.40% -1.48% 0.36% -0.36% 0.25% -1.64%
1995-3 0.13% -0.22% 0.12% 0.06% 1.01% 1.10%
1999-3 -0.18% -2.69% 0.52% 1.69% -0.56% -1.22%
2003-3 -3.52% 1.22% -0.55% -0.16% -0.58% -3.60%
2007-3 1.09% 0.63% 1.71% -0.03% 0.11% 3.51%
Avg -0.58% -0.51% 0.43% 0.24% 0.05% -0.37%
 
SPX summary for Presidential Year 3 1955 - 2007
Avg -0.19% -0.27% 0.42% 0.23% -0.13% 0.08%
Win% 42% 42% 67% 50% 50% 50%
 
SPX summary for all years 1953 - 2010
Avg 0.06% -0.12% 0.09% 0.00% -0.11% -0.07%
Win% 42% 48% 44% 42% 50% 40%


Money supply (M2)

The money supply chart was provided by Gordon Harms. M2 is continuing to expand on a slightly elevated trend.

M2 Money Supply


Conclusion

The real test will be coming Monday and Tuesday when the market has its next down day or two. If new lows continue to decline that will imply minimal risk, if they increase enough to turn the new low indicators downward this rough patch will last a little longer.

I expect the major averages to be higher on Friday March 25 than they were on Friday March 18.

Last week's positive 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 long-term behavior of U.S. equity sectors and how difficult it is to be confident that trends will continue. Not surprisingly, he offers a solution to the shifting tides of investment performance in the U.S equity market.

Thank you,

 

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