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The idea of endlessly repeated…

Decision Time

Decision Time

Last week, I mentioned that…

Technical Market Report for June 11, 2011

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

The market is down 8%+ in the past month and there is no fear.

Volume usually spikes during a decline, especially as the market nears a bottom, and that has not happened

The chart below covers the past 6 months showing the NASDAQ composite (OTC) in blue and a 5% trend (39 day EMA) of NASDAQ total volume (OTC TotVol T) in orange. Dashed vertical lines have been drawn on the 1st trading day of each month.

OTC TotVol T spiked during the decline in mid March, but has faded during the decline so far this month.

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 met.

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).

This decline will be over then OTC NL moves sharply upward.


The positives

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

New lows have been expanding while new highs have been declining.

The chart below covers the past year showing the OTC in blue and a 40% trend (4 day EMA) of NASDAQ new highs divided by (new highs + new lows) (OTC HL Ratio) in orange. Dashed horizontal lines have been drawn at 10% increments for this indicator, the line is solid at the neutral 50% level.

At 16% this indicator is at a level where short term rallies often begin.

The chart below covers the past year 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.

At 9% the indicator is near historic lows.


Seasonality

Next week includes the 5 trading days prior to the 3rd 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 3rd 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 years have been slightly negative, however average returns during the 3rd year of the Presidential Cycle have been very strong.

Report for the week before the 3rd Friday of June.
The number following the year is the position in the Presidential Cycle.
Daily returns from Monday through 3rd Friday.

OTC Presidential Year 3
Year Mon Tue Wed Thur Fri Totals
1963-3 -0.03% 0.03% 0.44% 0.27% 0.24% 0.94%
1967-3 0.73% 0.67% 0.64% 0.15% 0.62% 2.81%
 
1971-3 -0.57% -0.19% 0.07% 0.00% -1.17% -1.86%
1975-3 0.70% -0.69% 0.05% 1.29% 0.82% 2.16%
1979-3 0.06% 0.65% 0.07% 0.01% 0.17% 0.95%
1983-3 0.89% 0.63% 0.62% 1.38% -0.12% 3.41%
1987-3 0.00% 0.50% 0.21% 0.12% 0.03% 0.87%
Avg 0.22% 0.18% 0.21% 0.70% -0.06% 1.11%
 
1991-3 -0.15% -0.55% -1.27% 0.11% -0.01% -1.88%
1995-3 0.41% 0.70% 0.17% 0.78% 0.66% 2.72%
1999-3 -2.03% 0.68% 4.27% 1.04% 0.76% 4.73%
2003-3 2.46% 0.11% 0.52% -1.70% -0.24% 1.16%
2007-3 -0.05% -0.87% 1.28% 0.66% 1.05% 2.06%
Avg 0.13% 0.02% 0.99% 0.18% 0.44% 1.76%
 
OTC summary for Presidential Year 3 1963 - 2007
Avg 0.20% 0.14% 0.59% 0.37% 0.23% 1.51%
Win% 58% 67% 92% 91% 67% 83%
 
OTC summary for all years 1963 - 2010
Avg -0.17% 0.05% 0.08% -0.03% 0.00% -0.07%
Win% 44% 56% 66% 47% 60% 52%
 
SPX Presidential Year 3
Year Mon Tue Wed Thur Fri Totals
1955-3 0.94% -0.13% 0.81% 0.18% 0.35% 2.15%
1959-3 -0.52% -0.75% 0.94% -0.07% 0.14% -0.27%
1963-3 -0.44% 0.11% 0.10% -0.11% 0.34% 0.00%
1967-3 0.52% 0.63% -0.24% 0.10% 0.05% 1.07%
 
1971-3 -0.84% 0.10% 0.20% -0.02% -1.52% -2.08%
1975-3 1.04% -0.96% -0.21% 1.80% 0.64% 2.31%
1979-3 0.41% 0.92% -0.53% -0.11% -0.11% 0.60%
1983-3 1.33% 0.42% 0.96% 1.21% -0.01% 3.91%
1987-3 0.35% 0.68% 0.02% 0.29% 0.42% 1.76%
Avg 0.46% 0.23% 0.09% 0.63% -0.12% 1.30%
 
1991-3 -0.57% -0.41% -0.92% 0.09% 0.62% -1.19%
1995-3 0.56% 0.97% 0.08% 0.12% 0.50% 2.23%
1999-3 0.02% 0.56% 2.24% 0.71% 0.22% 3.76%
2003-3 2.24% 0.09% -0.16% -1.52% 0.00% 0.65%
2007-3 0.10% -1.07% 1.52% 0.48% 0.65% 1.68%
Avg 0.47% 0.03% 0.55% -0.02% 0.50% 1.43%
 
SPX summary for Presidential Year 3 1955 - 2007
Avg 0.37% 0.08% 0.34% 0.22% 0.18% 1.18%
Win% 71% 64% 64% 64% 77% 79%
 
SPX summary for all years 1953 - 2010
Avg -0.06% 0.10% 0.05% -0.16% -0.03% -0.10%
Win% 57% 53% 49% 45% 57% 52%


Money supply (M2)

The money supply chart was provided by Gordon Harms. M2 growth jumped last week.


Conclusion

The market is deeply oversold and seasonality for next week is very strong.

I expect the major averages to be higher on Friday June 17 than they were on Friday June 10.

Last weeks 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 recent DALBAR report on investor behavior and offers his own cure for foot-shooting investors. Read about it at: http://alphaim.net/

Thank you,

 

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